Well, now I have gone and done it. I am an options trader.

For years, I have been trying to find some sort of financial instrument to allow me to gamble with spare money. High risk type stuff. I already have a 401k and a Roth IRA, and a money market account, so I am not worried about saving money for retirement, because I have those covered. I wanted to be able to take very small amounts of "spare" money, if such a thing even exists anymore, and use it to make quick turn arounds. If you have just 100$, and can double it 5 times, you end up with 3200 bucks… 200, 400, 800, 1600, 3200. Is this hard to do? Yeah, maybe even impossible, but if you can't and you lose it all, it is just 100$, and you'd spend that much in a slot machine in a couple of hours in Vegas, or you would certainly drop that amount on a football game bet. So I was constantly looking for a way to truly gamble with the stock market. Let's face it, long term investments are great, but they are a bit boring. Watching golf on TV is the same way, until you bet money on it, it sucks donkey balls, and then suddenly it’s interesting.

Am I out of my mind? No. I educated myself enough to have firm grasp on the concepts, and I think I can explain it easily to anyone who might be confused on the subject. Options can be risky, but they certainly do not have to be. For the time being I am doing the most basic type of options trading, buying 'calls' and 'puts'. In these types of investments, you can NEVER possibly lose more then the amount you put into it. Never.

What the hell does that mean? Not much really. One thing I noticed while learning options is that almost every single term related to options is confusing and vague. I have no idea why this is, but it is. Here, I'll explain.

Trading Options is based largely on what you think the underlying stock will do, go up or down. For every Joe Schmo out there that thinks a company will go up, there is another who thinks it will go down. So similar to sports betting, there is action on both sides. "Options" are basically just guaranteeing the ability to buy or sell a stock as a specific price right now, regardless of what its future price is.

Let's look at the optimists first. They think a certain stock will go up, so they buy what is known as a "call". Again, no idea why it is labeled a "call" or "call option", but it is. I'll use a real world example so it will be easier to comprehend. I think Ford stock will go up. Why? Doesn't matter, I just do... I have my reasons. Ford stock was trading at around 4 bucks a share. I want 100 shares, but I don't want to spend 400 dollars right now. So I buy an option to buy ford stock for 4 dollars a share, regardless of its future price. To do this I have to pay a premium. In this case, the premium was .85 cents a share, or 85$ total for 100 shares. (**I should mention here that most options are always in batches of 100**). So in other words, I can pay 85$ now to buy 100 shares later for 4$ each. Pretty simple right? Oh, another thing, the "locked in" price of an option is called the "strike". Why the hell would anyone name it that? No idea.

So I do so. Now let's look at what happens. Each option has an expiration date. This simply means that I have to close my position on or before that date, and there are 3 different ways that it can close.

1 - Say Ford stock drops to 3$ a share. In this case, the value of the stock is worth less than I can buy it for, so I simply do nothing and let the option "expire worthless". It just disappears. I just lost my 85 bucks. No big deal I suppose.

2 - Say ford stock goes up to 8$ a share. In this case, I can "exercise" my option, and buy my shares for my locked in rate of 4$ a share. In order to do this, I would then need $400 to pay for the shares, but I will have just bought something for 4$ that is currently worth 8$. That’s money momentum! Pretty good shit. If I think the stock was going to go up more, I might hang on to the shares, but since I am only in it for short term quick cash, I would immediately sell the stocks, and enjoy my reward.

or

3 - Say ford stock goes up to 8$ a share, but I really don't want to exercise and buy the shares, because I just don't have 400$, or for whatever reason. Well, I still own a locked in ability to buy it for 4$ a share, so I then sell this ability to someone else, except instead of the 85 cents a share I paid for this ability (85$ total), I sell it for the new current going rate of that particular option, which at that point, would be dramatically higher. Now, the ratio of option price to current stock price is not 1 to 1, so the option isn't worth exactly double since the stock price doubled. In this example, Ford stock jumped about 25% in a couple of days, and the 4$ strike option jumped well over 50% in value. So I would have made some decent fast cash without ever buying or selling any real world stock had I sold it at that time. I plan to hold out a little longer and see what happens.

Ok, so that's buying a call, so what the hell is a "put"? A put is the exact opposite action of a call. Why name it a put? I assume because someone somewhere was a complete fucking moron. So you would buy a put if you think the stock is going to go down. A put is the ability to sell a stock at a locked in rate. So essentially there is someone on the other side, who thinks the stock will go up. The end of the option is also the same, it either expires worthless because the stock went up instead of down, you exercise and really purchase the shares at the lower current price then sell them at the higher rate you locked in, or sell the puts themselves for a handsome profit.

So as you can see, there is really no risk beyond your initial investment in the premium for locking in the rate in either one of these scenarios. The problem with options trading that people run into is when they sell options as opposed to buying them. When you sell an option, you are legally obligated to purchase or sell the underlying shares, whereas when you buy them, you have the right, but not the obligation. So if some jackass sells a call on shares he does not have, and the price of the underlying stock skyrockets, he is obligated to sell you the stock at the rate you locked in, even though it will cost him more to buy it than he will get in return. In other words, he sells a call of ford for 4$ because he thinks the stock will go down in value, then the stock jumps to 8$, and the call buyer exercises the right to buy, he has to buy the ford at 8$ and sell it for 4$. Bad business.

There are really advanced extravagant and complicated stock options strategies that involve buying and selling both calls and puts at the same time, but they are far beyond my comprehension on this time, so I am sticking to the easy stuff.

Ok, so stock options are not that scary, and have huge potential, so go try it!


"Try and fail, don't not try, or you're a pussy"
--Me 2008