Greetings! Today, I'll be pinch-hitting for our usual options guru, Dan Colarusso. No fear, I've been covering the options beat as Dan's co-pilot, and I think I can manage a solo. But keep those parachutes at the ready.
Since I am a newbie in answering your questions, I thought I'd sift through the mailbox for questions from other newbies who are just getting started. So, if you think examining your options means choosing between the Broncos and the Falcons this Super Bowl weekend, today's column may be a kick between the goal posts for you.
Dan will be back next week. Meanwhile, send your questions to
email@example.com , and please include your full name.
Could you recommend a book for an options beginner, and point me to an archive of your articles, which would be useful? -- Bruce Woda
Second things first. You can find an archive of the daily Option Buzz stories and the weekly Options Forum, where we answer questions from readers like you, right on our site's search engine. May I suggest a key search term: options.
As for the book, Dan has given me many a hefty tome to read, with such formidable titles as
Options: Essential Concepts and Trading Strategies
. But for the newbie, there are any number of books written with the beginner in mind. One that was described in a review with the "if you buy one options book, this is it" tagline was
Options: A Personal Seminar by Scott Fullman.
Fullman is chief options strategist at
Swiss American Securities
. And since he writes in a plain, explanatory manner -- much like when he's going over a complex strategy with me -- the newbie can pick this up pretty easily. There also are worksheets and plenty of examples to keep your head clear.
When asked to plug his book, Fullman says: "I just like educating new investors and customers."
Also, Michael Thompsett's
Getting Started in Options has a third edition out, and I hear the update's pretty good. In this case, a little education is a good foundation.
How Can I Make a Fast Buck?
I have recently come into a small sum of money ($5,000) and want to invest it in options for a quick turnaround, and than invest that money in stocks. But I can't get a handle on where to start. Everyone I have talked to on the phone says there is no way I can make any money, and I might as well kiss the $5,000 goodbye. But I know people who have doubled or even tripled their money. I understand there is great risk in buying options/futures but someone has to be making money, or why else would so many brokers be selling them? Could you please give me some idea of where to start? I have read a lot about this on the Internet, so I am a little ahead of the game. (I think.) -- Deborah Lydy
Gee, I'd love to have your problem. Unfortunately, I think you have an unrealistic view of how fast and how easily people transform their spare cash into millions. It's not your fault -- this rah-rah, higher-higher hype of the stock market can make anyone think there's nothing to it. But, at least some people are giving you some cautious direction -- and I'd agree. The quickest way to lose that nest egg is to think you can double or triple it in a very short time.
In an atmosphere in which everyone thinks they can get rich, scams and con games abound. And if you are getting your information on the Internet, then you're already swimming with the sharks. Be careful.
Okay, lecture over. You asked a specific question -- where best to invest $5,000 in the options market. Let's talk to an expert, in this case, Dennis Bein, portfolio manager for
. Bein says he is cautious about giving anyone advice if they have such unrealistic expectations of risk and reward. "They'll always say, 'I don't mind if I lose it, if I can double or triple it', but then when they do lose it they're pretty angry," he notes.
When pressed, Bein says a two- or three-month near-the-money call on a standard stock, such as
, would be inexpensive, but wouldn't provide the huge upswing you expect. Internet or tech stocks might see the upswing -- or they might see a huge downdraft. Either way, they are likely to be too expensive to fit this play.
Of course, you could always just go to
and put it on red.
Inside Open Interest
When you write that such-and-such option traded, say "4,000 contracts today against an open interest of only 500 contracts," well, what does that imply? Is the open interest number "500" a count as of yesterday, or does it include the 4,000 traded today? How does the picture change if there were 5,000 open interest instead of 500? Please explain. -- Norman Pan
Open interest is the total number of contracts already existing in a certain strike price. So if I say, or write, as the case may be, there are 4,000 contracts traded against 500 contracts of open interest, that means the number of new contracts trading today was much greater than all the outstanding contracts traded in that strike price so far -- about eight times greater in this case.
So why is that important? Well, new interest in a strike price indicates some investors are making a strategy one way or another. It may be difficult to tell exactly what that strategy is so far, but clearly, new money is involved.
But if the open interest is greater than the day's trading, say 500 contracts move against 5,000 open interest contracts, it's likely that there is no new money involved. In those cases, it's quite possible that an investor with a previous position (part of the 5,000 contracts of open interest) could be liquidating or otherwise closing out his position. In that case, as far as options news and our readers are concerned, this information is far less important.
Because February starts this week, and the short month is a leap year once every four years -- but not this year -- let's jump into the subject of LEAPs:
I've been playing with calls for half a year now and have done pretty well so far. I am trying to figure out whether highly priced LEAPs -- which give you some piece of mind at the expense of a substantial time premium -- are the way to go when investing larger amounts of money (in my case the range is $20,000 to $40,000 in a single call position) in such volatile sector as Internet? I never hold my positions for longer than a month. Could you explain pros and cons of this strategy? -- Lue Semanek
Hmm . . . from a question about an extra $5,000 to one about $40,000? I'm definitely making progress.
Let's see what an expert thinks. High-tech options pro John Hayes, of
, says he doesn't see much wisdom in your strategy since you are paying a high price for a long-term option that you don't hold on to.
"He's paying for premium he is not using," Hayes says, likening the strategy to leasing a car for 10 years when you know you will get rid of it in three. "You have the piece of mind of knowing you could keep the car for 10 years, but is that worth all the extra cost? It doesn't make rational sense."
Hayes says that one alternative strategy, since you are only holding the options for a month, would be to switch to calls that are closer to the front month, or at the most, are two months out. That way you are paying for the time premium you are using. And with a volatile sector like the Internet, it may make sense to keep your options open and on the front burner.
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