Options Know-How: Lehman, Wachovia

How much do you know about playing the stock market with options?

The following are highlighted options insights and ideas from TheStreet.com.

From Lehman's Options Plays Suggest Fear:

On the heels of the mid-June announcement of a $2.8 billion quarterly loss, Lehman Brothers (LEH Quote) announced $6 billion in fresh financing, and conceded that an additional capital infusion would likely be required. Option traders smelled blood and starting buying chunks of put contracts. Lehman might be in deep trouble, according to their bearish bets.

To be sure, conditions could still materially weaken for Lehman. The investment bank still has $65 billion in risk exposure, which is likely to be subject to greater stress if the economy weakens further. Since the bank has not disclosed certain large illiquid positions, "investors continue to assume that there is something to hide," notes UBS' Glenn Schorr.

As the stock slipped below $23 a share, volume and implied volatility flew to record levels.

Read the full article.

From Mad About Options: Walk Away From Wachovia (Video):

Ed McDaries and Jud Pyle review Jim Cramer's recent bearish comments about Wachovia (WB Quote) and offer options strategies for traders and investors. The Mad About Options crew also breaks down options ideas for AT&T (T Quote) and Exelon (EXC Quote).

Pyle: "If you own the stock [Wachovia], one thing you might want to look at, is selling an upside call and buying a downside put."

To watch the video, click the player below:

From Dykstra: Deep-in-the-Money Calls 101:

Using deep-in-the-money calls allows you exposure to the best companies in the world at a fraction of the price of the common stock... If more investors did their homework, they would realize deep in-the-money calls are one of the few tools that can help you, the retail investor, find an edge.

The strike price, or exercise price, of an option determines whether that contract is in the money, at the money or out of the money. If the strike price of a call option is less than the current market price of the underlying security, the call is in the money; the holder of this call has the right to buy the stock at a price that is lower than the price he would have to pay to buy the stock in the open market.

To sum it up, my strategy for in-the-money calls is to use them when a solid company is being beaten down on Wall Street for one "transgression" or another. My theory is that this overreaction will eventually correct itself as the value of the company reasserts itself over time; those who buy deep in-the-money-calls in advance of this correction will be rewarded.

Read the full article.

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