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I've encountered the term "LEAP" quite a lot while lurking on many message boards. It turns out that it refers to a long-dated option to buy, and seems quite popular, especially among people who buy high growth stocks (especially this board).

My question is just a general one: what are the pros and cons of options trading? I've never really had contact with it, and am curious as to why simply buying stock in a good company is not enough (why buy options to purchase in the future?), and why options in the general seem to be synonomous with 'speculative' and 'easy way to losing your shirt'?

Thanks.

grimani
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grimani,

I'd suggest you go to the education section of CBOE.

www.cboe.com

It has a wealth of information about options trading.

Disclosure: I don't currently trade options but have been doing alot of research in preparation to do so.

Best of luck,
26.2
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grimani:

IMHO options are only traded "regularly" by experienced day traders and/or momentum players, and not by most LTBH investors. There are exceptions.

As a LTBH investor I will occasionally use options or LEAPS as a way to protect downside risk as long as the premium is not to high. In other words, I can lock in a certain percentage of profit without selling any of my shares. These are called purchasing "puts".

The opposite is true of purchasing "calls". You're betting that the stock price will go up so that you can sell the "call" at a profit.

Options are also known as "derivitives". The main reason for purchasing them is that you can play a greater number of shares for less investment $$$, and thus, increase your profit potential.

Statistics show that the overwhelming percentage of option contracts (sorry, I can't recall the exact figure) are never excersized. Meaning the underlying stock is never bought or sold. Some options are sold before the expiration date at either a profit or loss. Most options expire worthless.

With owning an option you are subject to time constraints. You could have a really great company, that due to market conditions, etc., may have a temporary rise or loss in price. Combine this with the time constraint and it is a recipe for disaster. If you own the underlying issue, there is no time constraint, and you merely hold onto the stock (assuming LTBH attitude) until the market or driving force recovers.

Sorry for the long post. A short options lesson. Ooops, sorry for the pun!

Hope this helps in your decision.

Biglad
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Statistics show that the overwhelming percentage of option contracts (sorry, I can't
recall the exact figure) are never excersized. Meaning the underlying stock is never
bought or sold. Some options are sold before the expiration date at either a profit or
loss. Most options expire worthless.


I've seen this "fact" expressed many times now, and I have to disagree. Just by looking at the stocks that I buy options in, the overwhelming majority of the call options are "in-the-money", and these (should the stock remain above the strike price) will ALL be excercised by whomever is holding them when they expire.

I think the above statement must count each time an option is sold, as one contract can be bought and sold several times before the expiration date. Therefore one option may be counted 10 times before it is excercised.

But every option that is in the money WILL be excercised on expiration. It just may not be the original buyer who excercises it.

Nonetheless, I'm no expert and getting into options is something that should be considered VERY CAREFULLY.

I was lucky to have started learning about them BEFORE
this rocket took off. And I have remained lucky up till now. That could change, however, but I keep very little money in options, and the downside on buying calls and puts is limited to the amount you spent buying them. WRITING calls and puts is another story. Don't go there.

Tim
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Tim -

Perhaps I should have worded it more correctly. You may be correct in saying that the overwhelming number of calls that YOU purchase are "in the money". I congratulate you! However, that doesn't account for the entire market. Nor does it let you know if the sellers or buyers made a profit or a loss with all of the trades. This does not mean that the options are excersized for the underlying stock. I am assuming for the sake of this discussion that even you are not excersizing and purchasing the underlying issue. Rather you are selling prior to expiration for a profit.

In any case, this was a good excersize and probably of value to someone out there. Until later....

Biglad
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Options. The risk in options is their temporal limitations (ie, they expire). I am not arrogant enough to think that I can predict the short-term movement of the market or a stock.

However, overtime, I have found that it doesn't take arrogance to accomplish this. It is reasonably possible to do this with specific stocks that you follow very closely - within a few months range (at least in this bull market). This said I have never bought a short-term option, might some day for kicks, but have never found it necessary.

On the other hand I have started using LEAPS of 2 years duration or longer. LEAPS are options with expiration dates either 1 year, 2 year, or 3 years out. Such contracts remove much of the temporaral risks associated with short-term options. For my tastes LEAPS with 1 year to expiration are too risky. I'm more conservative. Others prefer the shorter-term LEAPS. LEAPS provide less leverage than short-term options because they are more expensive but generally provide approximately 2 to 1 leverage over holding the underlying stocks. I have made a lot of money with conservative and prudent use of LEAPS.

This said, I'm just going to bring the subject up so you know what they are. I also find that I'm an excellent roller blader and an expert mountain biker racer. When I go down a mountain (via either method) to me its kicks or competition and no big deal. On the other hand when I've brought friends (or my wife) up to try it, it turns out what seems so easy ain't actually so to the inexperienced.

So I will leave the learning how to use options to those who desire to put in the work to become well acquainted with the markets and options and who thereafter decide to make use of these investing tools. The two biggest risks of options are (1) not knowing how to use them and (2) gambling. I never gamble, I invest. Stay within yourself, know what your doing and options can be a valuable tool. On the other hand, I'm not sure, but I doubt if Bruce Brown has ever used an option and I can't say his portfolio has suffered in the least. Mine is larger than it otherwise would have been had I not made judicious use of LEAPS but it wouldn't be doing that badly without it.

Tinker
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On the other hand, I'm not sure, but I doubt if Bruce Brown has ever used an option and I can't say his portfolio has suffered in the least. Mine is larger than it otherwise would have been had I not made judicious use of LEAPS but it wouldn't be doing that badly without it.

You're right Tinker, I've never used an option outside of the software programs on my computer and when buying cars when the salesperson would ask "What options would you like to have with that Japanese set of wheels you're looking to buy?".

I will admit, I have no idea if my portfolio performance would have been better or worse had I used options. At this point, it doesn't really matter to me. I took a class in San Francisco back in 1990/1991 when I actually had a panic attack that this singing thing was not going to work out as a career and was getting pressure from the family to 'produce'. The class was to be working towards becoming a certified equities broker. Although I enjoyed the class, I saw too many 'negatives' in that industry to give it any more thought as an alternative career.

Yet, I learned an invaluable amount of things from a top team of brokers who were teaching the class. There were about a dozen of us in the class and we were able to really dig into the information and discuss it well. I remember well our study of options, commodities, futures and contracts. I believe one broker from Paine Webber said to hop in your convertible and cruise down highway 1 (that's the highway along the coast where there is always a tremendous amount of wind), take a wad of $100 bills and once you hit about 80 miles an hour, throw up the wad of bills high into the air. Whatever lands in the backseat is what you get to keep. This was in reference to retail investors playing the options/futures, etc... game. I realize that people who study and become 'experts' in it can do well. Yet, as an investor, I saw other avenues that would lead to riches in an easier execution strategy for my tastes. The same set of brokers who taught the class were always pounding the table every day in class on Cisco which started trading during the course on April 20, 1990. I didn't listen enough to take heed until a little more than two years later. Which means I'm not writing fisherman in the box provided by the IRS 1040 form as profession category. Opera singer probably sounds just as odd to the IRS... Regardless, I learned enough in that class to stay away from options and haven't suffered because of it.

I also don't use LEAPS, but understand that many gorilla gamers have used them on the side to boost their returns.

BB



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Any recommendations for beginning opera listening.

The first operas I listened to made me fall in love with the genre: Carmen, Madame Butterfly, and Don Giovanni. Be sure to get a synopsis of the story and an English translation.

--Hjelmerus
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