To illustrate the concepts, let’s go on a shopping trip.

You’ve been thinking about buying a MacBook Air, Apple’s thinnest laptop, for a few days and you’ve done some research to find the best deal. You head for the mall on Saturday and spend most of the day trying to find the lowest price. This turns out to be $1799 for a 2.13 GHz MacBook Air.

Suddenly you realize that you have a dinner guest coming this evening and need to get groceries. Fortunately, the nearest store is right in the mall. Unfortunately, you discover that you forgot to bring your credit card and need to pay cash for the groceries. This leaves you with $150 plus some change.

On the way to your car you discover another electronics store, and to your amazement, the 2.13 GHz MacBook Air is advertised at $1499. Not believing your eyes, you go in and the store manager confirms the price but says that they have only one unit left. How are you going to nail down that price without sufficient cash and without a credit card?

You ask the store manager if he will hold the unit for you in return for $100, and that you will return in two hours to purchase at $1499. If you are not back in two hours, the store manager can sell it to someone else.

You make a written agreement, signed by both parties, that the unit cannot be sold to anyone else for next 2 hours but only to you at $1499 in exchange for $100, and that the $100 is forfeit if you do not return within 2 hours.

You have just engaged in “Options trading” The following options trading terminology should now make a lot more sense to you.

Options Contract – is what the note is called that you and the store manager just signed.

Underlying (underlying stock/share) – is the MacBook Air 2.13 GHz that you have agreed to pay ($1499).

Strike Price – is the agreed upon purchase price (in this example $1499).

Call Option – the type of contract in this example is a “Call Option.” It gives you the RIGHT but not the OBLIGATION to buy the MacBook Air. In order to exercise the “right to buy” you must return within 2 hours, and the store manager must sell it to you at $1499. If you change your mind, you do “not have an obligation” to buy. You simply don’t return and lose your $100 hold money.

Option Expiry – for this example the expiry is 2 hours, meaning that the option contract will cease to exist after 2 hours.

Option Premium – this is the $100 hold money you paid. It’s the cost to enter into this contract. This is not a deposit against the purchase price, but money the store will keep either way for providing you with the convenience. So, your effective purchase price will be $1599, which is still better than the $1799 “best deal” you had identified earlier, and it is the reason you entered into the contract.

Long Call and Short Call – for this example you have the “Long Call” since you are buying the contract for $100, and the store manager has the “Short Call” since he is selling the contract and gets to keep the $100.

Now let’s evaluate the risk exposure for both parties to the contract:

Your risk is limited to the $100 hold money you paid, i.e., a Long Call Option buyer’s risk exposure is limited to the premium paid. If, hypothetically, the price for the MacBook Air tumbles to $1000, then there is no way you would return and purchase it for $1499! If, hypothetically, the price shoots up to $2599 within the 2 hours, then your immediate profit would be $1000.

The store manager, on the other hand, has unlimited risk and limited profit potential. A Short Call Option seller’s risk exposure is unlimited while the profit potential is limited to the premium received. Yes, he gets to keep the $100 in case of a price drop where the buyer is not returning to purchase, but if the price for the MacBook Air shoots up to $2599 within the 2 hours, he stands to lose a lot of money because he cannot sell it to someone else for the revised price.

Hopefully, this will have taken some of the mystery out of options trading and its lingo. As illustrated by our example, we are engaged in these types of transactions in some form or other in our daily lives. We’re just not aware of it. As you gain knowledge and practice, it will come to you quite naturally.

At TradeGreeks we focus on educating investors in the world of options, where profit potential is unlimited and is not restricted to a bull market. We have created options trading strategies that are so strong and so predictable, that we can solidly stand behind an unprecedented guarantee: You will get the return we promise, or your money is refunded with no questions asked.

Visit us at http://www.tradegreeks.com for more options trading articles and register for a free membership.

This was an article from our series ‘Covert Life of Investment’.

Properly executed, these strategies have the advantage of minimal expenses – something everyone can appreciate during these troubled times. The following example will demonstrate how this is done.

Technical Tip: The seller of a Put Option is obligating himself to buy the stock at the striking price. For assuming this obligation, he receives the Put Option premium. For the more technical readers we have provided an in-depth article link at the bottom of this article.

On August 21, 2009, the day your August Put Option expires, two scenarios are possible: Either the stock price is greater than or equal to $50, or it is less than $50. Let’s evaluate both scenarios.

Scenario 1: The stock trades at $50 or above: in this case the Put Option will expire worthless and you get to keep the $400 that you received earlier. You can now repeat the strategy month after month. When carefully executed, you would have earned around $7,200 in 18 months without ever paying a dime and without even owning the stock.

Let’s assume the share price for the stock has gone up 41% to $72 over the course of those 18 months. If you now purchase the 100 shares of XYZ Corp., the cost of ownership to you is ZERO, as you would have offset the $7,200 required for that purchase by your strategy earnings. You are now the proud owner of 100 shares XYZ Corp. at no cost to you.

Scenario 2: The stock trades below $50, say at $48 (a drop of 11% from $54). In this case the August Put Options will be In-The-Money (ITM) and now you need to buy 100 shares of XYZ Corp. at the strike price of $50. But here is the best part: You get to keep the $400 that you earned earlier selling the Put Option. Your effective cost for this trade is $4,600 after adjusting for $400.

Compare this with someone who bought 100 shares at $54. Share traders ended up with a loss of $600 while you had a modest profit of $200 instead. Well not as good as Scenario 1, but not bad either!

The strategy acts like a low-cost replacement for actual stock ownership, BUT you must be prepared to take ownership of the shares under Scenario 2 circumstances. Keep in mind that this is a long-term strategy.

There are many different ways to construct these strategies – conservatively or aggressively. Just like regular investing, different people have different levels of risk tolerance. If you want higher profits, you’ll have to be willing to take higher risks.

At TradeGreeks we avoid high risks that MIGHT hit the big jackpot. Our focus is on conservative strategies with medium to long-term consistent, predictable returns. This will ensure great profits that beat anything else you might try in this market – sometimes well over 100% per annum. What’s even more important: Our strategies ensure peace of mind!

This is an article from the TradeGreeks’ “Tactical Series”

More in-depth explanations of this strategy can be found in our article “Uncovered Put Writing – Insider’s Guide”. We invite you to visit http://www.tradegreeks.com/ and register for free no obligation membership. This will allow you access to the article and many other educational resources regarding trading of Options.

The financial markets are a similar system. It works best for the investor when trading practices are in balance, and Options Trading is the way to achieving balance for sustained, long-term returns.

If you have invested in the stock market for a while, you are probably pretty frustrated by wrongly guessing a stock’s move more often than not. Psychologically, most investors will bet on an upward move, and there certainly are a lot of researchers and advisors out there who will tell you things like “you can’t miss with this one – the fundamentals are just that good.” The problem is that there are so many things that can happen to a company that are simply not predictable: A product recall, an insider scandal, unexpected regulatory problems – the list goes on. Options trading takes this into account and hedges the bet.

Options trading is similar to a gambler hedging his bets on the roulette table by splitting his money between red and black, odd and even, certain series and other alternatives. Playing in this manner does not result in a sudden huge win, but rather in steady, sustained profits. That’s the difference between a novice and a professional.

The psychology of investing is similar to betting on a crap game. You can win by betting that you’ll win, or by betting that you’ll loose. There are only a few gamblers who bet on the latter, and that is similar to short-selling in the markets, i.e., betting on a stock’s downward move. If you are a more sophisticated investor, you may have tried that. How did that work out for you?

The point is, you are only betting in one direction, and that’s the problem. Options are an exciting alternative and the perfect way of hedging your bets and moving from guessing to safe investing. If you are a beginning investor when it comes to options trading, you would do well to subscribe to a reputable service that will do all the research and give you recommendations as to what moves to make and when.

Options research includes many different elements – not just “the stock will move either up or down”, but scenarios that take into consideration how long the stock may trade in a certain range, whether it will stay low for a few months but rise in the long term, whether it will trade cautiously until earnings are achieved, and then take off or fall dramatically. What’s more, with options you can always adjust your trade and change your strategy to fit the current market trend. What more can you ask for?

Options are like a balanced ecosystem that shield you from the wild up-and-down gyrations of financial markets that are so prevalent right now. If you are interested in more information, visit www.tradegreeks.com and opt in to the TradeGreeks Options Traders Newsletter. Then if you like what you see and want to participate, we invite you to become a member of TradeGreeks.

You are currently reading an article from our article series ‘Covert Life of Investment’.