Crash Market Stocks - Financial Tips On Making Money In A Recession

A frequent question I have been receiving in emails have been dealing with my decision to trade options for my long positions. I understand option trading can be confusing, but I thought I would dedicate a post to give a quick definition of options trading, more particularly call options rather than puts, considering that calls are mostly what I have been doing lately. Hopefully I can shed some light on why I choose to trade them. If you are currently having grief with your trading platform or are looking for a new platform to trade options with, I recommend TradeKing. Good platform, some of the lowest commissions I have seen, and they are running a $50 credit promotion for sign up before December. You can sign up here: Open an account at TradeKing and get $50.


First, an Option is a leveraged contract purchased at a premium, representing the control of 100 shares of a given stock. In other words, when buying an option, you are buying a contract with the "option" to purchase 100 shares per contract at any time within the contract period. Below is an example of a Call Option table for Apple. First notice that this is an option expiring Fri, Dec 19, 2008 as it says in the upper right corner. This means that the terms of this contract are valid until the given date. You can buy contracts years in advance of expiration. We will use this Dec 19 ending contract as an example. Lets brake it down.



Strike - This is the price per share that, if executed, the buyer of the option contract is able to purchase the stock. For example, circled in red is $90. This means no matter how high apple goes before the expiration date, I have the option to execute my contract for $90 per share.

Symbol - Every option contract has a unique symbol, much like a stock ticker. This just identifies the actual contract. You can track these in your portfolio traders much like regular stocks using these ticker symbols.

Last/Chg/Bid/Ask/Vol - These are all symbols that I am sure most of you will recognize, because they are found in the trading of normal stocks. They trade much like normal stocks. However, lets dive into the pricing of options.

Buying Call Options
You will notice on the $90 option, the Bid is $4.90 per contract. Now be careful, because this does not mean that each contract is $4.90 each. This means that your paying a $4.90 premium per every share you buy. Having 1 option contract representing 100 shares, this means that 1 option contract for this contract would cost you (4.90 * 100 shares) or $490. This represents your cost basis, as well as your maximum loss if Apple decides to tank. Remember, this does not give you ownership of 100 shares, just the right to purchase 100 shares at the "strike price." If you do decide to exercise the contract, you will have to pay the additional (100*90) or $9000 to own the shares.

So lets say we purchase this contract and pay our $490+commission. To do this, we select the "Buy to Open", which means we are opening this contract. As Apple stock continues to move, so will its option price. The only difference is that the option price will move with much more volatility, because of it's 100/1 leverage. This gives buyers a good opportunity to receive bigger gains as they choose to buy stocks at the right bumps. From now until the expiration date, we are now able to resell this contract. So if Apple ends up going up to $95, its option price will go up considerably more on a percentage basis. If we were to turn around and sell it, we would select the "Sell to Close." This would then free us from this contract. Many times you are able to flip an option contract within a few days and double your money. This means you are able to make a nice healthy profit without ever having owned the stock! However, this can get you both ways. It can go down just as fast as it goes up.

As time moves closer to the expiration date, demand will go down for the contract, especially if you haven't reached your "strike price." It is best to try and resell your contract with some time left before expiration. Anytime your option is "in the money", this means that the price of the stock is over the strike price you purchased it for. This usually will give you a good profit if you can get your options in the money.

When you buy an option contract, you are not obligated to exercise it. In fact, I rarely exercise an option contract. My goal is always to be able to flip the contract before it even gets close to its expiration date. However, if you wish to control the shares at the strike price, you're more than welcome to. I would just rather make my profits on the option appreciation, rather than forking up more money to purchase the actual shares. It's less of a hassle for me. If you choose never to resell the contract for whatever reason, your contract would then automatically expire (unless it was in the money, where sometimes banks will automatically exercise them) after the expiration date, freeing you from the contract.

The reason I choose to trade options, especially in this market, are for a few reasons. First, I like the volatility. If I time the bumps right, I will be rewarded far more on my options, than if I were to own stock shares for the same cost basis. Second, the ability it gives me to control hundreds of shares for a minimal basis. Options minimize my downside risk considerably rather than if I chose to own the actual shares. This makes me a lot more comfortable, especially in this market. Options have also been in more demand with the uncertainty of the market. On up days, options can be trading considerably higher, just from the premium people are willing to pay for the security.

Another side to trading options, are playing the short side, or Puts. This usually requires margin trading (which essentially means borrowing from your bank) and can be very risky if the market doesn't go the way you want it to. Sure, you can make a lot of money off of naked shorts, but I choose not to play them as often.

Most every Investment Bank allows for option trading. For some banks, a new application is sometimes required to be approved for option trading. Even with that, many times you are limited to what kind of trading you can do, depending on your experience. They will usually start you off of non-margin option trading to help you learn the ropes. If you can't trade options, check with your bank you trade with. I use Zecco.com a lot as I have found they have some of the most competitive prices for commissions.


I hope this helped those of you that have been wondering how to trade options to see if it's something for you. I have found options to be very profitable for me in this market and a great hedge for my short position. Covered calls can also be a great way to make extra profits on a long position you may be holding. By doing so, you can continue to lower your cost basis.

I hope everyone has a good week and holiday. See you tomorrow.