Investing

Options trading may sound complex and difficult, and it is. In this article I aim to explain how profit can be made by buying long call options on stocks and how they work – I in no way mean to imply that doing so will probably or even have a chance of resulting in profit. Long call options are easier to understand in my view, and if you’re interested in learning about short calls or other types of options please explore on your own.

First of all, you need to find a broker (preferably one with a website and lower commission). You then need to set up your account for options trading – some brokerages require that you physically sign a document basically explaining that you understand the risks of trading options and what your experience level is etc.

There are options for from what I’ve seen all publicly traded stocks not excluding foreign ADRs. Call options can be defined as the option given to the purchaser of the option to buy a stock at a given price in the future. That given price is known as the ’strike price’ and when the stock goes over that ’strike price’ the option is said to be ‘in the money’ and the buyer of the option will most likely exercise the option.

For example, if a stock is currently trading at $3.50, the strike price is $6.00, and the option costs $0.50 a person can buy one option (a bundle of 100 stocks) for $50. Keep in mind buying the 100 shares of the stock normally would cost $350 at that same time. If the stock goes to $10 before expiration (the time at which the options can no longer be executed) the buyer of the option will willingly exercise the option and make $4 minus the price of the option ($0.50) per share which would be a $350 profit. If the stock did not go above $6 by maturity, however, the buyer of the option will get nothing. Keep in mind that usually call options get more expensive the farther out the expiration date is due to the risk of holding the stock on the writer’s side and the higher probability in general that the stock will rise above the strike price.

The person who writes the option believes that the stock will not reach $6 by expiration date and will have made $0.50 on every $3.50 stock in the 100 stock bundle in the option, not a bad way to make money on the share you own. The risk the seller (also known as the writer) of the option takes is that the stock goes below $3.00 (in which case the writer loses more than he gains by selling the option) or the stock skyrockets above the $6 level in which case the seller loses out on the profits of his stock because he is forced to sell it at $6. For the visual learner (most people) the chart below is a straightforward way of explaining how this works.

Long Call

The question is looming, and if you haven’t heard by now the US is deeply in debt. While this is called the ‘public debt’ most rational people I know would not have wanted it to come this far, but it did.

Let me summarize a few key points that will often be brought up in these grim yet true commentaries and tidbits. Public debt is another name for government debt, and the debt I refer to is that of the Federal government. It is called public because the government traditionally draws income from the public through taxes. Of late the government has had to draw upon other sources for money including loans to other countries accomplished through treasury bills and other instruments where the government promises to pay interest provided they are loaned the money.

The national deficit, which is the difference between Federal government revenue and spending, was $1.4 trillion dollars for fiscal year 2009 – the largest on record and in terms of purchasing power the largest any country in history has ever overspent. The deficit is possible through the trust of the dollar and the US government – yet history has shown that national debt and high deficits are rarely actually paid off through painful budget adjustments and shrinkage of government.

In fact quite the opposite is true, the government will actually either destroy its own currency or heavily increase taxes – the first of which will be good for manufacturing yet destroy whatever wealth families have accumulated over the years in order, and the second of which stunts growth and would result in less jobs locally.

Let us hope the less trodden path is taken and prudent budget adjustments are made and expensive and useless wars are avoided. In this way the dollar may survive and people wont be forced into bartering for goods and going back to the financial stone age.

Another important point to bring up is the actual production of goods and wealth. If the US was able to increase economic output in areas which haven’t already succumbed to the manufacturing advantages of certain Asian countries it could also reduce its deficit via a shrinking trade deficit (which I should are proportional to national debt). As it stands, each working person in the United States owes over $60,100 if the national debt was evenly distributed amongst them. Over 10% of 2009’s tax income will go towards paying public debt, the amount of debt the U.S. bears is around four times its annual income (compare that to a person who makes $100,000/year whos debt is $400,000). Another interesting blog I read puts the US in the ’subprime’ category for buying a house.

How can you protect yourself from this? Aside from education, I would suggest either buying silver, owning land, steer clear of keeping large amount of money in low-yield bank accounts or checking accounts, and most importantly invest wisely. Of course spending money, while ironic, is one of the best ways of not accumulating it. Spending it on things that retain value is also a good idea. If you have any more ideas feel free to comment.

Gold, who’s popularity and value is ever increasing, is being sold on-line by retailers who are out to scam the vulnerable. They will trick you into believing you need to buy ‘premium’ coins in order to avoid being forced to forfeit your gold to the government should the time arise. They say that coins with ‘collectors value’ will be spared. However, they simply order thousands of identical coins and have them all graded by the same company and then charge a 30% premium over the spot price.

Local dealers, on the other hand, will most likely mark you up only $50 to $100 above spot price (5 – 10%).

It is for this reason I recommend, if you are to buy physical gold, to go to your local dealers and gold shops and buy it from them. This also excludes the shipping fees and also potential loss or damage during shipping.

Does the following look familiar to you? If you were a Goldline customer they will say this is a collector item yet they ship them to every single customer and when the price was under $1000 / ounce they were charging more like $1300.