newbie question about options
 

I have a good understanding of the stock market with exception to options. i honestly dont know understand them at all. can someone please explain. ty.

Re: newbie question about options
 

A good overview:
http://www.investopedia.com/university/options/

Options on futures:
http://www.orionfutures.com/opts.htm#terms

Options as used for employees:
http://money.howstuffworks.com/question436.htm

If you really want to get into it, here is an online tutorial:
http://www.cboe.com/LearnCenter/Tutorials.aspx#Basics

Re: newbie question about options
 

McMillan's books are also good

Re: newbie question about options
 

1) The only real use of options is when you have a large gain but you do not wish to trigger taxes by selling. You can insure your gains by purchasing options. If it were not for taxation, much fewer options would be sold as people would just sell their positions. All other options tranactions are gambling or by people that cannot sell for other reasons.

2) People that sell you the options are 'sharps' and they are not doing it because they want you to be rich.

3) Try your local business library (it's free). It might be worth your while to go to buy a finance 101 text, perhaps last years from ebay or what ever. Their may even be an online course worth the effort.

4) Stocks are actually options. They are an option on the value of a company exceeding it's liabilities (debts).

5) Just for fun you might take buy an option for a few hundred $ (cost to you of 1 option = 100 x listed price) on a 2007 option and watch what happens over the next few years.

6) Good luck you will need it.

Re: newbie question about options
 

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The only real use of options is when you have a large gain but you do not wish to trigger taxes by selling.

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there are many reasons one would want to purchase various types of derivative securities.

in fact, this sentence was so dumb and displayed such a fundamental misunderstanding of derivitaves markets that i stoppped reading; i hope (for the sake of the forum) your post didnt get any worse.

Re: newbie question about options
 

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i hope (for the sake of the forum) your post didnt get any worse.

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It did.

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4) Stocks are actually options. They are an option on the value of a company exceeding it's liabilities (debts).

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Wrong. In fact, this doesn't even make any sense.

There are 2 kinds of options: calls and puts. I’ll describe call options now, and puts in a moment.

When you buy a call option, you buy a contract that gives you the right to buy a specified stock at a specified price on or before a specified date. The stock is called the “underlying,” the prearranged price is called the “strike price,” and the specified date is the “expiration date.”

This contract is not free – it comes at a price that is at least loosely based on a “theoretical value” for that contract. For example, as I type this IBM stock is trading at $89.96 per share on the NYSE. IBM call contracts with a strike price of $80 (giving the contract owner the right to buy IBM stock at $80.00), and an expiration date in July are going for $12.30 per share on the CBOE. If you were to buy the contract and exercise at that same moment, you would end up owning 1 share of IBM stock but you would have paid a total of $92.30 for it ($80 for the strike price + $12.30 for the option itself).

That doesn’t mean options are bad – they have their place. In fact, there are lots of professional traders who do nothing but trade options.

There are also put options. They are the same as call options, with 1 difference. Instead of being a contract to buy stock at a specified price, put options are a contract to sell stock at a specified price. Everything else is the same.

You can either buy or sell options. If you sell an option, you don't have to own one first. You can just write up your own options contract and sell it in the marketplace. This is different than the stock market. In the stock market, there are X shares of ABC company that traders buy & sell amongst themselves. But in the options market, contracts come in to and go out of existance all the time.

Options aren’t for everyone, but it is absolutely incorrect to suggest that they have no place in a diversified investment portfolio. And it is wrong to imply that anyone trying to sell you an option is trying to rip you off. I haven’t given you enough information to be able to trade in options profitably – or even safely. Options could carry a great deal of risk. It would be a very bad idea for anyone reading this to execute options trades if the extent of your options knowledge is this post. You could lose your shirt. I'm serious - you could really get in to serious trouble if you don't know what you are doing. Much more trouble than just buying & selling stocks.

Re: newbie question about options
 

"there are many reasons one would want to purchase various types of derivative securities."

Name some, silly boy. Options (and all forms of insurance) are used by people who have more risk than they are compfortable with but cannot simply stop the activity they are engaged in. People buy homeowners insurance because they cannot face the risk of a fire, but cannot sell the home as they need a place to live. They sell the risk to insurers that are better able to manage the risk.

People buy stock options because they have a position that has more risk than they are comfortable with but they cannot sell, usually to avoid capital gains tax, or because they are company officers.

As to stocks being an option that is finance 101. A company has debt. Management has an option keep the business going or hand over the business the debt holders, that is the option. The option has a strike price of the debt amount. The excersise date depends on the cash burn rate. That is why a company like EXAS swings around so much. The stock no longer has an infinite excersize date.

Re: newbie question about options
 

[ QUOTE ]
Name some, silly boy. Options (and all forms of insurance) are used by people who have more risk than they are compfortable with but cannot simply stop the activity they are engaged in. People buy homeowners insurance because they cannot face the risk of a fire, but cannot sell the home as they need a place to live. They sell the risk to insurers that are better able to manage the risk.

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yes, hedging risk is ONE possible use of options, but you're telling me you can't think of a derivitave position that's (for example) long volatility? options can also be used to circumvent margin requirements, as they are (in general) inherantly leveraged positions.

Re: newbie question about options
 

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Name some, silly boy.

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Montage. Theoretical pricing imbalances. There's 2 that have nothing to do with hedging stock positions. Want more?

Re: newbie question about options
 

What on earth is montage?