02-17-2009, 11:05 PM
Yeah, it's basically a leveraged bet (at least the way I play). I tend to go for short term "out of the money" calls and puts, which is to say I'm buying a call option for a value higher than the stock is currently at, or a put for a value lower than the stock currently is.
The advantage of that is you have limited downside and (theoretically) unlimited upside. In Maul's example, if you buy $10,000 worth of JNJ at $58, and the stock goes to $60, you've only made about 345 bucks (minus commissions). And if by some calamity the company goes belly up (not likely with JNJ, but entirely possible with a bank or DRYS), you've lost $10k.
If you buy $1000 of $60 call options for a $1 and the stock goes to $60 (and the option to $2), you've made $1000. If it goes to $70, you're going to make at least 10 times that. Meanwhile if the company goes bankrupt, you have a maximum of $1000 downside.
Having said all that, I definitely don't recommend them unless you have money you don't care about losing. I've made a lot this way (in AAPL, GG, AUY, etc), but I've also lost a bunch on bad bets.
With the Dow testing it's lows today, tempted to buy some puts tomorrow before expiration on Friday...
The advantage of that is you have limited downside and (theoretically) unlimited upside. In Maul's example, if you buy $10,000 worth of JNJ at $58, and the stock goes to $60, you've only made about 345 bucks (minus commissions). And if by some calamity the company goes belly up (not likely with JNJ, but entirely possible with a bank or DRYS), you've lost $10k.
If you buy $1000 of $60 call options for a $1 and the stock goes to $60 (and the option to $2), you've made $1000. If it goes to $70, you're going to make at least 10 times that. Meanwhile if the company goes bankrupt, you have a maximum of $1000 downside.
Having said all that, I definitely don't recommend them unless you have money you don't care about losing. I've made a lot this way (in AAPL, GG, AUY, etc), but I've also lost a bunch on bad bets.
With the Dow testing it's lows today, tempted to buy some puts tomorrow before expiration on Friday...
Ex SWG, L2, CoH, Wow, and War
Currently PvPing in the stock market
Currently PvPing in the stock market