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Can anyone explain options to me

There are 2 types of options- a put is the right to buy and a call is the right to sell.

Options are available at different "strike" prices for different months. They expire on the 3rd friday of that month.

You can buy or sell puts and calls. Though your broker might not allow certain plays if you are a newbie, and the only play that is allowed in most IRA accounts is a covered call.

Let's take a look at some JAKK options. JAKK options are currently traded for September, October, December and March.

It's very important with options to look at the bid and ask price. Assume that when you sell an option it will be at "bid" and when you buy it will be at "ask".

Last I checked, the underlying (ie-1 share of JAKK) was $18.15

Sept $17.50 calls have a bid of $1.45 and an ask of $1.70. This means that if you want the right to buy 100 shares of JAKK for $1750, you have to pay $170 (plus commissions). If you want to sell this right to someone else, you will get $145. Options are always in 100 share lots unless otherwise noted.

If September 21 rolls around and JAKK is over $17.50, you can "call" for your shares, that is pay $1750 and receive 100 shares. Note that since you paid $170 for this right, that you are really paying $19.85 per share when all the smoke clears.

You can buy the shares right now for $18.15, so you are effectively paying 9.3% more than if you just bought right now.

On the other hand, what if there's a real problem and the stock goes to 10? You'll have lost the $170, but you'll still have $1750 kicking around that you didn't spend on the stock. You can now buy 175 shares with that money. So even though you "lost" $170, you really "won" 75 shares.

September $20 calls have a bid of 35 cents and an ask of 55 cents. If you just want to gamble that the price gets above $20.55, you can do this. Let's say September rolls around and the stock is $25. Your calls will be worth $5 each, a gain of 809%. And if the stock drops, you only lost $55 total.

If you own shares and you're fearful that they might drop further, you can buy a put. A December $17.50 has a bid of $1.75 and an ask of $2.10. So if you shell out $210, you will be protected from now to december for any decline past $17.50.

My personal preference is to sell covered calls. In June, when the stock was $16.99 I bought some shares and sold september $17.50s for $1.55. This means I effectively paid $16.99 minus $1.55 or $15.44 for the shares. If the stock is over $17.50 on September 21, I will get paid $17.50 each. So this would be a return of 13.3% for 3 months, or 65% annually. If the stock goes down, I can sell another call.

If you are comfortable with the idea that JAKK will go to 21, you might consider a march $17.50, which has a bid of $3.40 and an ask of $3.80. If there is real trouble and the stock goes below $14.35, you will be better off than you would have been with buy and hold. If the stock goes above $21.30, you will start to make a profit. However, note that the stock has to rise 17% just for you to break even or fall 21% for you to stay ahead of buy-and-hold.

If I had my choice, I would personally buy the stock for $18.15 and sell a December $20 call for $1.55. This means I am paying $16.60 for the stock and if it does get above $20, it will be a 20% return in 4 months, or 74% annualized.

It's a really, really good idea to do this all on paper for a few months or even a year before you actually do it in real life. But it is an excellent supplement to the prudent investor.
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I am starting to warm up to the idea of options due to some recent experiences, EJ. Namely, Polymedica. I had a stop loss on that one, unfortunately the stop loss doesn't always sell at the price you wanted. The stock was halted and when it reopened it triggered my stop loss order, which I would have cancelled had I not been at work. Needles to say I wound up selling my shares at a price too low for my tastes. This is where I think I can start to like options, for their ability to preserve capital.

I hope to do as you said and practice some techniques on paper for a long while before getting involved with real money. Looks interesting though. I know the CBOE exchange website has some great tutorials. Do you know of any other sources of info?

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The Fool has an excellent board in Speakers Corner called "Options- You Make The Call".

Most of the people who are into options are heavily into technical analysis. As such, they don't always see eye to eye with a value guy like me. But most of the people there are nice enough and willing to share their experience with newbies.

PLMD is an excellent example of a stock where it pays to own options. Either owning some puts on the shares you own, or selling your shares and buying calls that represent the shares you used to own would have saved your bacon in the last month.

On that one day when PLMD dropped to 15, a September 15 call was $1.50. This is outlandishly expensive- 10% for an at-the-money call that expires in 6 weeks, but it would have been better owning that call when the stock dropped to 10 than it would have been to own the corresponding shares. Or, buying puts on your shares would have elimated any future downside past the strike price.

If the major reason you're into PLMD is to capitalize on the eventual short squeeze, then options are really better than buy-and-worry. The stock may be irrationally cheap at 10, but there's no reason the irrationality couldn't continue to 5, and it's also possible that the irrationality isn't so irrational.

Besides the preservation of capital, most people get into options for speculation. That is, they want to capitalize on the increase in the price of the option. Personally, I don't have the temperment for it. I end up watching the underlying stock every second of every day and fretting over every 5 cent move.

By contrast, my personality is very well suited for covered call writing, though most options traders couldn't stand it. For instance, the September 17.50 JAKK calls I sold for $1.55 got as high as $5 when the stock was on the rise. This would have driven the average options trader up the wall, but I had to simply stay calm and remind myself that if JAKK is over $17.50 on September 21, I'll have made 13% in 3 months.

Conversely, I was not affected at all when JAKK made its mysterious 3 point dive last week. My call was in the money before the dive and it was in the money after the dive.

The biggest mistake I made so far with covered calls was buying back the call when the stock rallied. In both instances, the stock promptly dropped back to its old level and I got whipsawed. I quickly realized that it's best to be of the mindset that once you sell a call, you should forget about it until expiration no matter how high it rises.

On the other hand, if the stock drops 20-30%, it's prudent to consider either exiting the position (by buying back the call and selling the stock) or rolling down or out (buying back the call and selling a new, more expensive call either at a lower strike price or a longer time to expiration). It's important to remember that as a covered call writer, you are not stealing free money (as Wade Cook would have you believe). You are selling upside potential and accepting full downside risk.

Another pointer is that if the stock is highly volatile, you are better off selling an in the money call and if the stock is conservative and boring, you are better off selling an out of the money call. So if PLMD is $10, you might consider selling a $7.50 call. The converse is true for buying. On the volatile stocks, it's better to look out of the money and on boring stocks it's better to look inside the money.

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Thanks for the primer EJ.......
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I haven't been here for a while. I've been watching slnk for the past several weeks.

EJ, be careful with those option definitions-- Buy a call and you have the right to buy from someone. Sell a call and you give someone the right to buy from you. (keyword - buy)

Buy a put and you have the right to sell, sell a put and you give someone the right to sell to you.

calls=buy puts=sell

your option strategies are on the money with covered calls; a good way to get your target price when the stock doesn't move, and surpass it if the stock goes up.
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I actually have done major corporate business with the key Executives at Jakks. Their self-interests are not really different then most of corporate America, do what is necessary to increase the value of the company, and, thereby, its stock. And, of course, their personnel wealth.

Having said that, their CFO, Joel Bennett is extremely bright and is very active in all the major decision making along with the key honchos, Steve and Jack. And, the Flying Colors key Executive, Michael Bianco, who I know quite well, is absolutely brilliant. And, no, he is not WWF involved. His recent claim to fame is "Gooze", last years KMart's toy product of the year.

So, suffice it to say Jakks is much more "Hungry" then is Hasbro and Mattel, and their focus is Marketing, marketing and marketing.

Buy, Buy, these prices.
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