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Stock Option Glossary

Hedge:

No, this is not that green growing fence in front of your house that needs trimming every year.  Instead, a hedge is a method of reducing risk by putting on one option position and simultaneously selling another that contradicts what you hoped would happen with the first option.  Sounds like something a schizophrenic might do.  But it does make sense even to a rational investor. 

With a hedged bet, you give up some possible gain in exchange for a reduced loss if the market does not behave as you expected it to do.  A good example of a hedge is any option spread you might buy.  Common examples are the calendar spread, a butterfly spread, or a vertical spread.

Intrinsic Value:

In the option's world, intrinsic value is the difference between the current selling price of the underlying stock and the strike price of the option.  If an underlying stock is trading at $45 and a call option with a strike price of 40 is trading at $6, the intrinsic value of the option is $5.  The other $1 is called the time premium of the option.  It is the extra amount you have to spend to enjoy the benefit of having the right to buy the stock at $40 without having to come up with all the cash.

Maintenance Requirement:

This is something your broker will charge when you sell a credit spread with options.  There is no interest charged on a maintenance requirement but cash in your account is set aside by the broker.  You can't use this cash to buy other options or stock.

The requirement is calculated by the maximum amount that you could theoretically lose on the spread you place.   For some silly reason, the broker wants to make sure that you end up with enough cash to cover that potential loss so that he doesn't have to cough up the money himself.  It doesn't really sound fair, does it?  With all the commissions the broker is collecting on your trades, you would think he would be willing to take a little risk once in a while.  But that's not the way it works.  They insist that you take the entire risk.

One neat thing about selling a credit spread is that the cash you collect from selling a credit spread is used by the broker to offset any margin loan you might have on stock that you have purchased.  So if you break even on the credit spread, you might save a little in interest on your stock margin loan.  It probably won't change your way of living, but it beats a stick in the eye (as my mother used to tell me whenever I complained about something that was a positive, but only slightly so).

Terry's Tips Stock Options Trading Blog

December 4, 2014

Further Discussion on an Options Strategy Designed to Make 40% a Month

Last week we outlined an options play based on the historical fluctuation pattern for our favorite ETP called SVXY. This week we will compare those fluctuations to the market in general (using the S&P 500 tracking stock, SPY, as the market definition). We proposed buying a vertical call spread for a one-month-out expiration date with the lower strike about 6% above the starting stock price.

The results were a little unbelievable, possibly gaining an average of 65% a month (assuming the fluctuation pattern continued into the future). If you used an outside indicator to determine which months were more likely to end up with a winning result, you would invest in just under half the months, but when you did invest, your average gain might be in the neighborhood of 152%. Your average monthly gain would be approximately the same if you only invested half the time or all the time, but some people like to increase the percentage of months when they make gains (the pain of losing always seems to be worse than the pleasure of winning).

This week we will offer a second way to bet that the stock will rise by 12.5% in about 38% of the months (as it has in the past). It involves buying a calendar spread rather than a vertical call spread (and sort of legging into a long call position as an alternative to the simple purchase of a call).

Terry

Further Discussion on an Options Strategy Designed to Make 40% a Month:

First. Let’s compare the monthly price fluctuations of SPY and SVXY. You will see that they are totally different. . . .

November 28, 2014

An Options Strategy Designed to Make 40% a Month

I hope you had a wonderful Thanksgiving with your family and/or loved ones, and are ready for some exciting new information. Admittedly, the title of this week’s Idea of the Week is a little bizarre. Surely, such a preposterous claim can’t possibly have a chance of succeeding. Yet, that is about what your average monthly gain would have been if you had used this strategy for the past 37 months that the underlying ETP (SVXY) has been in existence. In other words, if the pattern of monthly price changes continues going forward, a 40% average monthly gain should result (actually, it would be quite a bit more than this, but I prefer to underpromise and over-deliver). Please read on.

We will discuss some exact trades which might result in 40%+ monthly gains over the next four weeks. I hope you will study every article carefully. Your beliefs about options trading may be changed forever.

Terry

An Options Strategy Designed to Make 40% a Month: First of all, we need to say a few words about our favorite underlying, SVXY. It is not a stock. There are no quarterly earnings reports to push it higher or lower, depending . . .

November 17, 2014

An Interesting Way to Invest in China Using Options

A week ago, I reported on a spread I placed in advance of Keurig’s (GMCR) announcement which comes after the market close on Wednesday. I bought Dec-14 140 puts and sold Nov-14 150 puts for a credit of $1.80 when the stock was trading just under $153. The spread should make a gain if it ends up Friday at any price higher than $145. You can still place this trade, but you would only receive about $1.15 at today’s prices. It still might be a good bet if you are at all bullish on GMCR.

Today I would like to discuss a way to invest in China using options. One of our basic premises at Terry’s Tips is that if you find a company you like, you can make several times as much trading options on that company than you can just buying the stock (and we have proved this premise a number of times with a large number of companies over the years). If you would like to add an international equity to your investment portfolio, you might enjoy today’s discussion.

Terry

An Interesting Way to Invest in China Using Options: My favorite print publication these days is

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