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November 5 th 2012
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Common Cents Investment Group November, 2012 Agenda T-Shirt Pre-orders Today in the Market More on options…
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Common Cents Investment Group November, 2012 Today in the Market Presidential Election We’ve discussed our elections have made impacts in the past A quick video from Bloomberg discussing the two candidates economic policies http://www.bloomberg.com/news/2012-11- 05/economy-set-for-better-times-whether- obama-or-romney-wins.html
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Common Cents Investment Group November, 2012 Today in the Market Hurricane Sandy Aftermath Experts say overall economic data won’t change dues to balancing b/w industries Restaurants hurt, but grocery stores thrive Some impacts on the market… Nation’s airlines cancelled 16,300 Home Depot on the rise Total losses could be upwards of $25 billion
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Common Cents Investment Group November, 2012 Today in the Market Companies we did not mention Loss analysis companies Kinetic Analysis Corp, Eqecat Cell phone service Verizon Wireless lost 6% of their towers in the Sandy effected region Expects to have an impact on fourth quarter earnings 19% of all cell phone towers were effected
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Common Cents Investment Group November, 2012 Useful Definitions Liquidity: The ability to convert an asset to cash quickly Synonym – Marketability Clearing House: An agency or corporation responsible for settling trading account, clearing trades, collecting and maintaining margin money, regulating delivery and reporting trade data
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Quick Recap o Don't worry if this seems confusing - it is! o We are going to look at options from the point of view of the buyer Options
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Common Cents Investment Group November, 2012 Options Option: A financial derivative that represents a contract sold by one party (option writer) to another party (option holder) An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an asset at a specific price on or before a certain date.
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Common Cents Investment Group November, 2012 Options Can be very risky…usually carry a disclosure “Options involve risks and are not suitable for everyone. Option trading can be speculative in nature and carry substantial risk of loss. Only invest with risk capital” A sophisticated security with a tremendous amount of versatility and power Options can be as speculative or conservative as you want
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Common Cents Investment Group November, 2012 Options A Call gives the holder the right to buy an asset at a certain price (hope the stock will increase substantially) A Put gives the holder the right to sell an asset at a certain price (hope the stock will decrease substantially)
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Common Cents Investment Group November, 2012 Options The total cost (the price) of an option is called the Premium and it is determined by several factors: Stock price Strike price (contract price) Time remaining Volatility Called a derivative because they derive their value from an underlying asset
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Common Cents Investment Group November, 2012 Call Options Buy a ticket to Ohio State football game Three different options Go to the game: Like executing option Sell your ticket: Selling your option Let it expire: Don’t use option and let it expire University gets the premium either way…so it does not matter to them
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Common Cents Investment Group November, 2012 Options – The Call The right to purchase the security at a certain strike price by a certain date You want the security to be on an increasing trend (either long-term or short-term) Bullish
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Common Cents Investment Group November, 2012 Options – The Put The right to sell the security at a certain strike price before a certain date You want to capitalize on a decreasing trend (either long-term or short-term) Bearish *Not necessary to own the asset before acquiring the right to sell it
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Common Cents Investment Group November, 2012 Exchange-Traded Option Exchange-Traded Option: An option traded on a regulated exchange where the terms of each option are standardized by the exchange Also known as “Listed Options” Benefits: The liquidity of the option The standardized contracts that come with ETOs Quick access to prices and the use of clearing houses by exchanges
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Common Cents Investment Group November, 2012 Standardized Options Standardized expiration dates The Saturday following the third Friday of designated months is a common expiration Investors typically view the third Friday of the month as the expiration date of the ETO
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Common Cents Investment Group November, 2012 Standardized Options The striking price of an option is the predetermined transaction price In multiples of $2.50 (for stocks priced $25.00 or below) or $5.00 (for stocks priced higher than $25.00) There is usually at least one striking price above and one below the current stock price
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Common Cents Investment Group November, 2012 Standardized Options Puts and calls are based on 100 shares of the underlying security The underlying security is the security that the option gives you the right to buy or sell It is not possible to buy or sell odd lots of options
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Common Cents Investment Group November, 2012 Standardized Options Chicago Board Options Exchange (CBOE) Known as a listed option Fixed strike prices and expiration dates Each listed option represents 100 shares of company stock (known as a contract) ~$30/share right now…
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Common Cents Investment Group November, 2012 Buying and Selling Options Consider Dell Inc. (DELL) Currently at ~$9.30/share Could buy either a Call or Put option Use FA or TA to decide what trend is likely How to read an Option Table… Yahoo! Finance has a good example
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Option Table
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Strike: The price you want to purchase at later Last: Recent price of option Chg: Percent change to current Bid: What you can sell the option for Ask: What you can buy the option at
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Common Cents Investment Group November, 2012 Option Table Notice the expiration date This specific standardized table has expiration dates every month Not always the same dates The options highlighted in yellow In-the-Money (ITM) More advanced tables exist for better analysis
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Common Cents Investment Group November, 2012 Buying an Option Dell Inc. is currently ~$9.30/share A Nov 12 th Call option at $9.50 goes for $0.52 The total contract price is $0.52 X 100 = $52 If Dell Inc. shoots up to $11.00/share… Profit = 100 x (11.00 – 9.50 – 0.52) = $98 100 shares provides a lot of leverage Potential loss was only $52
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Common Cents Investment Group November, 2012 A Call option is only worth anything if the stock price rises above the strike price With a premium of $0.52 and a strike price of $9.50…the breakeven price is $10.02/share A situation: We buy the $9.50/share option now and 1 day from now DELL shoots to $11.00/share, BUT we hold it Before Nov 12 th, it drops back down to $9.00/share
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Common Cents Investment Group November, 2012 Here’s what happened to the value of our option: Remember: Call option for $9.50/share DateNow1 Day laterNov 12th Stock Price$9.30$11.00$9.00 Premium$52 Contract ValueN/A$150N/A Gain or Loss-$52$98-$52
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Common Cents Investment Group November, 2012 Options Upside: Profit is unlimited while loss is controlled Call: Profit = Spot Price – Strike Price – Premium Put: Profit = Strike Price – Spot Price – Premium Downside: The premium you pay will be lost if the option is Out-of-the-Money (OTM) at expiration Considered risky because of how likely this is to occur
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Common Cents Investment Group November, 2012 Membership Cost is only $20 for the whole year! Benefits: Member of a very beneficial and informative club that will inevitably be valuable in your future A network of friends who share a similar interest in investing and personal finance A virtual portfolio challenge that will strengthen your confidence in investing
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Common Cents Investment Group November, 2012 Membership Make sure to check out our website for the presentations Monday night | ccig.osu.edu Get on our Facebook page and like us! www.facebook.com/ccigosu
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Common Cents Investment Group November, 2012 Questions? Questions, comments or concerns?
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