| Options are one of the oldest trading
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| | Actually, any stock price at or below the
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| vehicles man has ever used. Around a 1000
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| | strike price will be in his favor.
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| B.C Aristotle Thales predicted by the
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| | However, here's a very bad scenario. The
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| stars that there would be a bumper olive
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| | call writer sells short a naked call. And
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| harvest and bought options on the use of
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| | the stock leaps 50%. He's got big
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| olive presses.
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| | problems. Somebody's going to want to buy
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| When the harvest did in fact prove to be
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| | XYZ from him for $100 per share, just as
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| a great harvest Thales was able to rent
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| | the option contract states.
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| the presses at a significant profit.
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| | But he doesn't own any shares of XYZ. So
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| When you buy an option you have the right
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| | he now has to go to the open market and
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| but not the obligation to buy (call) or
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| | buy 100 shares at the current market
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| sell (put) a specific underlying asset at
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| | price, which is $150 per share. He took
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| a prearranged price on or before a given
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| | in $400 of premium and now has to cover
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| date.
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| | is with a $15,000 stock purchase, for
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| Similar to futures, options can give the
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| | which he will only receive $10,000. He
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| holder protection against adverse price
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| | loses $4600 ($10,000 - $15,000 + $400).
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| moves.
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| | Not a happy ending.
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| Call options when bought allow you to buy
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| | Do NOT even consider selling naked calls.
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| an asset at a fixed price (strike price)
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| | Your broker probably would not allow you
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| on or before a specific exercise date.
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| | to anyway. However, until you really know
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| Exercise date: some options can only be
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| | what you are doing, don't sell naked puts
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| exercised on a particular date and they
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| | either. When the bottom drops out of a
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| are commonly know as European options.
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| | market, naked put holders get very, very
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| Options that can be exercised on or
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| | badly hurt. They are forced to pay high
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| before the due date are commonly known as
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| | prices for low priced stock. You do NOT
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| American options).
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| | want to be in this position!
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| A Put options is the reverse of the call
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| | An option gives you something called
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| option. When you buy a put option it
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| | leverage. Leverage is when you are able
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| gives you the right but not the
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| | to control a large amount of money with a
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| obligation to sell an underlying asset at
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| | small investment. Each option contract
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| a predetermined date.
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| | lets you control 100 shares of stock for
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| Now let's look briefly at the result of
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| | far less than the cost of buying those
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| selling naked calls. In this scenario,
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| | shares. But leverage is not the best
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| the call writer simply sells the call and
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| | reason to trade with options.
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| does not own any of the underlying stock
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| | True, with the leverage that options
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| to cover the short call. If the stock
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| | afford you, you stand to risk less and
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| plummets, the call writer is very happy
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| | make more, assuming things move in your
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| and relieved.
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| | favor AND in your time frame. Remember
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| The premium of $400 is his to keep, and
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| | the expiration date! You have traded
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| no one will be knocking on his door
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| | leverage for limited shelf life. If
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| asking to buy the stock for $100 per
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| | things don't move your way soon enough,
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| share, since it is available on the open
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| | you lose. So, what is the main reason to
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| market for $50. It's his ideal scenario.
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| | trade options? Spreads!
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