January 22, 2009
Trading Options?
curl joe asked:
I see that a call for payx Jan 09 is around $4.40 at $50 strike - now if i bought one contract that would cost $440 right? also if i bought this planning to trade it later and not ever excersice it would i be fine with only the $440 or do i need enough $ in my account to cover the stock when it is exercised? im getting confused when someone says i need to have enough to cover my bets - i just wanna buy a Jan 09 call for $440 and sell it in 6 months - how much would i need to buy that?
I see that a call for payx Jan 09 is around $4.40 at $50 strike - now if i bought one contract that would cost $440 right? also if i bought this planning to trade it later and not ever excersice it would i be fine with only the $440 or do i need enough $ in my account to cover the stock when it is exercised? im getting confused when someone says i need to have enough to cover my bets - i just wanna buy a Jan 09 call for $440 and sell it in 6 months - how much would i need to buy that?
thanks
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Comments on Trading Options? »
All you need is $440 plus the commissions. You are buying the option, which gives you the right to buy 100 shares of PAYX at $50 before the option expires. If you do want to exercise the option and buy 100 shares of PAYX, at the time you did that, of course you would need to have $5,000 in your account to buy the stock. But since you are not planning to buy the stock — only to sell the option (if it has any value) in six months, you don’t need the money in your account now. However, if instead of buying the call you had sold it (in other words, you were a “naked writer” or “short” the call), then you would need the money in your account in case somebody exercised it against you. In fact, you would probably need at least $100,000 in your account to be permitted to do that sort of a trade.
The calculated value for that option is $4.20 as of 1600 hrs PDT 8/8/07. Bid that and you will probably get it at that price, instead of the $4.40 ask (the $4.20 was the last trade). And, yeah, you are only out $440 plus commission. The upside is unlimited, but the downside is tht all $440 is gone and very quickly. The leverage is amazing and options are not for the faint of heart.
Options can be used by those that are skilled, but are a dangerous trap, like penny stocks, to folks looking to make a profit with little investment.
Remember that 85% of options expire worthless! Those aren’t great odds. Lenny Dykstra has a good options strategy.
Lenny Dykstra