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Fellow Investors & Traders,
Today we are going to talk about one of the most important aspects of
buying Stock Options.
“Stock Option
Prices -- What Price should you pay for a particular Stock Option”.
I will try to explain the strategy I
use as simply as I can. The
first thing I do when trying to determine what price I want to pay
for a particular stock option is to look at the activities of what is
going on with the company that I want to buy. Is the stock price on a up trend
or has it been trading down for some reason? That is what you need to
know.
Next, I look at the different “Strike Price” stock options to
see what price they are currently valued and write down the current
price of the stock options that I am interested in potentially
buying.
I generally track the price for a
day or so to see if the market is moving higher or lower from that
price. This is where your
research/due diligence comes in – taking into consideration what’s
going on in the stock market and within the company itself. Is it trending up or trending
down?
Example, Apple Inc. is
one of my top picks for buying stock options, so I generally keep up
with the company events, news announcements, earnings date and what
price the stock shares are generally trading at. If the news events are positive
for the company, I will buy the “CALL” Option contracts in
anticipation of the overall stock option prices to move higher. If
there is negative news announcements or events I will look to buy the
“PUT” Option contacts instead.
Here’s what your planning tasks
should be.
1. What company
stock option are you looking to buy?
2. Are you
buying the “CALL” Option or “PUT” Option contracts?
3. Which “Strike
Price” Option are you considering?
4. You have to
pick a “starting point price” so that you can have a price to compare
against when you are considering a price you would like to buy the
option. This is part of the
research/due diligence activities that will help you determine if you
are buying at the right time or not and possibly paying to much. Example, I wanted to buy AAPLE
Inc. AUG $155 “CALL” Option.
I noticed it was trading at $6.50 at the time I wanted to buy
it. I didn’t buy it at that
price -- instead I wrote down
the price of $6.50 on my sheet of paper as a reference point for the
AAPL AUG 155 “CALL” Option.
The next day the stock option price had traded down under
$6.00. After it traded down a
little more (around $5.50), I decided that the price had a high
probability of moving higher very shortly within a few days as
positive news of a price target upgrade was announced. That was the “advantage”. I was satisfied with paying $5.50
for the Options and willing to wait for the price to trade back
up. Several days later the
stock option price started to trade higher as I anticipated and I
closed that position at $14.00 for a nice profit. Click
Here! to see the
actual profit screen!
After reviewing all the
considerations I mentioned – the one question you will have to answer
is: “Are you satisfied with the price you have decided to pay for
buying the stock option”?
If you are satisfied with paying
that price, then go ahead and place your limit order for the price
you want. If your limit order executes (gets “Filled”), monitor your
position in anticipation of potential profits. Take your profits before the option
expires or when you have a nice gain. That is the goal of buying stock options. Your outlay
of money is much less than buying the stock shares, on the other hand
you have a limited amount of time to take your profits or limit any
losses.
If you are anticipating a
potential big price move in the stock option, the premium price you
will have to pay should not be a great concern – you will expect to
have gains shortly, so your goal should be to make sure you get in
position before the stock option price starts to trade higher. That is what will make it worth
the cost!
Take some time to practice this
strategy. Here are a few stocks that have good stock option activity
to practice with. (AAPL,
AMZN, BIDU, FSLR, GOOG, GS, IBM, ISRG MA, NDX, PCLN, POT, RUT, SHLD,
WLT, WHR WYNN, X).
Now,,,to recap how to practice. Do your research on few of these
companies to find out what is going on. Look for any upcoming events,
earnings or news announcements that could potentially give you an
advantage to making a decision on when to buy. Decide to buy a “CALL”
Option or “PUT” Option. Pick one of the “Strike Price” options that
would give you the best opportunity to make a profit. Write down the
stock option price and track it for a day or two to get a reference
point. Decide if you want to buy the option at that price or a lower
price depending on the information you found and the overall stock
market trend (is it going up or is it trading down due to some
negative news)?
Take your time and evaluate each
stock option consideration and always do the research first before
you try and pick a price to buy. Example, I follow AAPL (Apple Inc. )
regularly to see what is going on with the company – and look for
positive news events and upcoming earnings announcements. When they announce important news
events, the stock price trades higher (and so does the stock option
prices). This will help give you an advantage to know if you should
buy the “CALL” Option or “PUT” Option based on the positive or
negative events affecting the company. This is exactly the same activity I use every
week. Once you get started
practicing it will become easier to understand and find good buy
opportunities.
Try to buy stock options that are
“in-the-money” or “near-the-money”. These are the stock options that
will generally have greater price movement. You may have to pay more
in terms of the premium price and the trade off will be the benefit
of a larger price movement as the option price moves higher.
Remember this…….Stock
options that are “out-of-the-money” will start to lose value as they
get closer to expiration, unless there is some significant news or
event that sparks a rise in share price. That is why I mentioned the
consideration of buying stock options that are “in-the-money” or
“near-the-money”. These options will generally not have as much value
loss as the timeframe gets closer to expiration.
Just like other strategies – “It’s
All About Timing” – and Planning! That’s the key to getting in position to take advantage
of stock price movements whether you are buying the “CALL” Options or
buying the “PUT” Options for the stocks that you pick. You have to look for the
opportunities and using my weekly newsletter information can help you
get started with your research.
You need to have a good, simple,
easy to use stock price calculation program that quickly performs all
of your potential price calculation scenarios so you will see first
hand what your projected costs, percentages, gains or potential loss
would be before you place your buy transactions.
My Stock Price Calculation Program
is a excellent tool to handle all of your stock price calculations
quickly and easily for “CALL” or “PUT” Options. You can take the 7-day FREE Trial
to play with the calculation tool, then order your full version copy
to have for a complete program of tools for all your future buy
opportunities. Click here! To see all of
the Software Program Advantages!
If you have not taken the 7-Day
Free Trial! Download your free copy today -- play around
with some calculations and see how much simpler the program makes all
of your cost, profit and exit planning calculations.
See the 7-Day Free Trial link on the
homepage! www.newstocksoftware.com
If you have any
questions or need some “one-on-one” guidance, let me know – I work
with stock options every week and continuously look for
opportunities.
To your
success!
Jimmie V. Smith
markettrading@juno.com
Copyright 2007
Market Trading Technologies
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