by Dawn Pennington 08/06/08
Is gasoline going to $5 a gallon? Will the cost of corn and wheat continue to increase? Could the recent abysmal unemployment numbers make a turnaround in the coming months? Are things going to get even worse in the financial sector throughout the rest of the year?
Don't just ask the questions -- buy options to potentially profit from your answers.
There a million different ways to make money with options, and thanks to a group of financial services execs, now there are a million and one.
In May, a syndicate led by a team from the American Stock Exchange and the Chairman and CEO of TradeKing, Donato Montanaro, released the option market's newest offering: Fixed-Return Options. Both call and put FROs are available.
Although it may sometimes feel that your options trades can turn out to be "all or nothing" in this crazy market, FROs actually are a "winner take all" bet. So get your Vegas money ready and learn a new way to trade.
AN EASIER WAY TO GET AN OPTIONS 'FIX'
Most standard equity options have American-style exercise, in which the holder can exercise them at any time during the life of the contract. FROs are similar to index options, in that they have a European-style exercise, which means that they can only be exercised on expiration day. (Click here to learn more about different options exercise types.)
But where these instruments differ from traditional stock, equity or Exchange-Traded Fund options is that you either win or you lose come expiration day -- there is no partial value.
As the name implies, they pay a pre-determined fixed amount (currently $100) and are automatically exercised if they are in-the-money. However, if they are out-of-the-money at expiration, the owner gets nothing. In this case, the prospect of option assignment -- which tends to scare off would-be options traders who fear having stock "put" to, or "called away from," them if they are on the losing side of a traditional option trade -- is not even a consideration.
BINARY TRADES IN THE DIGITAL AGE
Fixed-Return Options are a class of equities known as binary options, which are essentially a yes/no investment that you either win or lose on your bet that housing prices, Consumer Price Index, weekly mortgage rates, crude oil futures, etc. will finish above or below whatever level you have picked.
They behave similarly to standard options, as there is an underlying instrument (i.e., stock, index, event), a strike price and an option chain in which you can select from various strike prices in both calls and puts.
But instead of trying to forecast where a particular stock, commodity, index or currency is going to be trading during a particular month and then identifying which types of options to buy or sell, you mainly have to pick the correct direction in which it will trade.
For example, the price of oil is either going up or down -- and these days, many of us would probably put our money on "up"! -- so your odds are 50/50 of being spot-on. You don't have to guess exactly where it will end up; all you need to do is place your bets on red or black and then see where the ball stops on the wheel, so to speak.
If oil is trading at $130 a barrel, you might buy a call option at the $135 strike. If oil keeps reaching new highs, how high it goes doesn't matter, just as long as it closes above $135 before the option's time is up so that you can pocket your $100 win.
If you are familiar with buying calls and puts, we'll show you how to buy them even cheaper.
Understanding Options Expiration
Just because a stock has options available for trading doesn't mean that there are options available to trade in each calendar month ... at a particular time.
Anatomy of a Stock Option Ticker
Option tickers may look like a bowl of alphabet soup to you, but each letter means something.
This technique can help you breathe a sigh of relief as it aims to relieve a 'choking' portfolio.
'Order' Your Broker to Enter Trades Cheaper
Let your broker do the work! With the right directions you don't have to be glued to your computer screen.
