What is an "option"?

The following is the official definition from the publication "Risks and Characteristics of Standardized Options":

"An option is the right either to buy or to sell a specified amount or value of a particular underlying interest at a fixed exercise price by exercising the option before its specified expiration date. An option which gives a right to buy is a call option, and an option which gives a right to sell is a put option. Calls and puts are distinct types of options, and the buying and selling of one type does not involve the other."

Sounds confusing, huh? If you already have an options trading account with your brokerage, chances are they already sent you a hard copy of this document, but chances are you haven't taken the time to read it. Regardless, you can click here to view the full publication. We strongly recommend you to read it before committing any real money on option trades.

Recently I came across a question regarding playing straddles around earnings in anticipation of a wild swing one way or another. People have been reporting mixed results and were wondering why. I summarized some of my thoughts below.

If anyone has any comments or sees flaws in my reasoning, please feel free to point them out. I`d rather be corrected than continue to be igonorant...

PS: a straddle is an option play where you buy both a call and a put, typically around the same strike price. This play will yield a profit if the stock price goes wildly on either direction, and loses money if the stock does not move far enough.

My take on Straddles:

IMHO, the issue with Straddles is that you are committing capital up front to buy two opposing positions. If you track the options premiums before earnings releases, you will find that the premiums are relatively high, because everyone knows that the stock will swing one way or another. This very knowledge causes the implied volatility of the near-term options to abnormally high levels in comparison to some further-out options.

I recently received a couple of member messages asking why they lose money on the Balance Sheet the moment they bought a stock or option.

The short answer is that it is because there is a Bid/Ask Spread for everything. So what is the Bid/Ask Spread?

If you look at any quote (e.g. click here to see a quote for GOOG), you will notice that besides the Last Price, there is also a Bid and Ask Price. The Last Price simply refers to the price at which the last trade was made, but that does not necessarily mean the price that you will be paying for your trade.

What you really should be looking at are the Bid and Ask Prices. The Bid Price is the current price at which someone is willing to Bid to buy shares from you. Conversely, the Ask Price is the price at which someone is offering to sell shares to you. In other words, you buy at the Ask Price, and you sell at the Bid Price.

Apparently a lot of traders are interested in Intraday Charts so they can see the behavioral trends of a stock within the trading day. Options traders are just as reliant (if not more reliant) on being able to spot these intraday trends and movements. However, many finance sites actually do not offer intraday option charts, and most options traders are forced to use the underlying stock charts as a trend indicator.

One of the cool things here at Tipping Monkey is that we actually offer a variety of option charts. Just enter an option symbol directly in the "Get Quotes" box, or get the quote of any underlying stock and click on an option symbol from the Option Chain, and you will see a chart for that option. The default duration is one-month, but you can click on the little tabs underneath the chart to see other periods, including Intraday prices if you click on ...

Read Full Article >>

I`m sure you were STRUCK by my title.

I would be too, but this time I ain`t lying.

Stock : EnerGulf ( ENGFF )

This company is about to strike a good amount of oil and gasoline in Azerbaijan.

This can lead to some cash if you make good investments. It can also be an oppertunity of quick cash.

So hurry. Stocks as of now are  2.12 or something like that per stock. You can buy a few hundred and be rich next week.

Heres the article so that you could see for yourself.

http://www.resourceinvestor.com/pebble.asp?relid=39247

Enjoy

- Jon

The 14 year old genius

Some of you may remember that we used to have a discussion forum at Tipping Monkey. There were some great posts from our members, but it seems like people like to trade more than to write, which is a good thing, so we decided to close down the forum and switch to a per-member blog format insted.

Recently there was a post asking for books on investment and taxes, which made me think of all the resources that were once in the forum. I don`t recall seeing a post on books related to taxes, but here is a compilation of previous forum posts on book recommendations by me and a few other members: