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International Investing / Australia (All-Ordinaries)


Subject:  Re: Options Date:  2/17/2002  3:46 PM
Author:  harmy Number:  3596 of 6186

Harmy, just the thought of trading options gives me white, very
white knuckles, like bunjy jumping,
Not my cuppa at the moment, but thanks..

I think this is the way most people (including myself in my early days) think about options. When you get into it you realise that it is simply another way of trading with no more downside risk that normal trading.
Buying in the money or near the money LEAPS (which is a form of long term option) can give you years before you need to think about trading them.
What options do is give you the right, with no compulsion, for a small payment, to buy a share at a given price at sometime in the future. If you don't want to buy it you don't have to. In other words you buy if it's gone up and don't buy if it's gone down. The only money you commit yourself to is the initial buy price of the option.
Here's an example. I've just looked the price of options on a company called Rambus (I previously owned shares in this company to my
cost LOL !!).
The share price of Rambus is presently $6.22
If you think the price of Rambus will rise to $7.50 (the strike price)by August then you could buy an option for $1.15 which expires in August 02.
(If you think the price will rise to $10.00 then the price is 60 cents - there are varying price chains - the more the strike price moves away from the current share price the cheaper it becomes.)
If the price doesn't reach $7.50 then the only money you've lost is the original $1.15 - you don't have to buy the share because it didn't reach the agreed strike price. On the other hand if, say, it rose to $9 then it would be worth buying because you add the price of the agreed strike price of $7.50 to the cost of the option which is $1.15 ie $8.65 and with the share price at $9 you would make 35c per share.
I've deliberately kept to "calls" not "puts" which is the opposite of a call ie if you think the price will fall you buy a "put".
Cass - all this is just something to keep in the back of your mind for the future when you may want to investigate options. Bear in mind that for a small amount of money you can control very large numbers of shares because options are usually traded in bundles of 100 shares, or at least they are in the US market. Also bear in mind that you can trade options just as you can shares. You can buy an option one day and sell it the next - in fact that is just what you do because if the price of the share is static or falling then you want to get rid of the option before it expires worthless.

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