market speculation for October

**Broken Arrow** · 10-15-2010, 10:32 AM

Originally posted by KTP View Post

I really wish I knew a bit more about options trading, but I don't think there is enough time for me to get up to speed to reach the point I would be comfortable buying them.

You can just buy the stock....

The big risk is they do something stupid before earnings, like announce they are paying a lot of money to buy yahoo.

They're not going to do that. Ever. Ballmer has already said that "They've made an offer, then another offer, and they've moved on". Thus, Bing was born.

Since I don't really have the balls to do anything, lets just pretend that today I bought $10,000 worth of Jan 21, 2011 options at $29 strike (about 60,000 shares, $0.17 per share).

You can't make money from an imaginary trade... but good luck just the same.

**KTP** · 10-15-2010, 11:00 AM

Yes, you could just buy the stock, but it would be about 1.5 million dollars to buy 60,000 shares. Good idea though.

I checked my IRA account, and for some reason you have to get all kinds of authorization to buy options. I am not talking about writing covered calls, but just to buy contracts of xyz company using your own money. I don't really understand this...what is the risk to them? I would just be doing a buy to open and then later a sell to close if in the money. The most I would have at risk is the contract cost plus commisions. (You don't encounter any further liability after you sell to close on a contract, do you???)

**KTP** · 10-15-2010, 11:57 AM

Ok, I got approval. It wasn't as many hoops as I thought.

Just to test the waters, I only purchased 100 contracts of jan 22 calls at 27.50 for $0.46 (so about $4700 with commisions).

Now the real test. If things go as I expect and there is a run-up before earnings Oct 28, will I have the will to hold out until december, or will I sell to close and lock in a 200%+ gain?

This is all in my play money IRA account that I started with $1700 (currently $31,400). I figure do any super high risk stuff in this account because of tax consequences.

In my taxable account I added 200 shares of MDT at 33.20. This is one of the holdings of VGHCX which has done very poorly this year but looks set for gains in the future.

**Broken Arrow** · 10-15-2010, 12:15 PM

Yes, you could just buy the stock, but it would be about 1.5 million dollars to buy 60,000 shares. Good idea though.

I can't tell the tone of this writing, but I think you know what I mean: Buying $10,000 worth of stock rather than $10,000 worth of option contracts. Of course, the resulting volatility is much lower, but when it comes to speculative trading, I don't think that's a bad thing.

Just to test the waters, I only purchased 100 contracts of jan 22 calls at 27.50 for $0.46 (so about $4700 with commisions).

I'm glad you took that one, because both the open interest and the trading volume is much higher, and therefore, you are much more likely to get your contracts quickly. That and lowering the strike price lowers your market risk.

Now the real test. If things go as I expect and there is a run-up before earnings Oct 28, will I have the will to hold out until december, or will I sell to close and lock in a 200%+ gain?

Not to be a jerk or anything, but isn't that a bit presumptuous? Luckily, the beauty of call options is that your loss is pre-defined. That is, you know you're starting out with a $4700 loss, and it won't be any more than that.

**KTP** · 10-15-2010, 12:22 PM

Originally posted by Broken Arrow View Post

I'm glad you took that one, because both the open interest and the volume is much higher, and therefore, you are much more likely to get your contracts quickly. That and lowering the strike price lowers your market risk.

Yes, that was one reason for moving to the 27.50 contracts.

Actually the 25.00 in the money contracts were quite attractive at $1.50 I should do more research on exactly which strike price makes the most sense based on a predicted future stock price (my prediction is $30 in december).

I really think they will all do pretty well in about three weeks. But time will tell of course.

**KTP** · 10-15-2010, 12:29 PM

Originally posted by Broken Arrow View Post

Not to be a jerk or anything, but isn't that a bit presumptuous? Luckily, the beauty of call options is that your loss is pre-defined. That is, you know you're starting out with a $4700 loss, and it won't be any more than that.

Yes, somewhat presumptuous. Very easy that the options could go worthless. I can handle a $4700 loss, but I would not be happy shorting a stock without some protection. I don't think I would ever do anything except buying calls or possibly selling covered calls.

**Scanner** · 10-15-2010, 12:34 PM

Hey, I am not sure of BA's tone here either KTP, but I am with you.

If you are going to speculate (or are commanded to), I am not sure why you wouldn't do anything except options or futures.

With the market being so efficient due to capitalization and there being no such thing as an "undervalued" or "overvalued" stock, why buy a speculative company (and Microsoft is anything but a speculative stock, I guess - it's kind of an oracle) stock and hope it goes up?

It seems like gambling on a stock here and there is kind of passe with how the market has evolved.

**Broken Arrow** · 10-15-2010, 12:42 PM

Originally posted by KTP View Post

Actually the 25.00 in the money contracts were quite attractive at $1.50 I should do more research on exactly which strike price makes the most sense based on a predicted future stock price (my prediction is $30 in december).

Well, the easiest way to tell is to simply add the strike price and the contract premium together.

In this case, it's $25 + $1.50. So, roughly speaking, you know MSFT has to be move up to at least $26.50 before you can break even.

So, the speculative question is, will it go above $26.50 before Jan 22nd?

However, you bought the $27.50 + $0.46, which is roughly $28.

So, your real trade is now, will it go above $28 before Jan 22nd?

Between the two, the $25 call option is actually the "safer" trade because it has a lower BEP. The trade-off though, is that you have to pay for a lot more in up-front premiums. In this case, about $15,100 rather than $4700.

However, if you focus on the downside risks, the worst case scenario with $27.50 contracts is that you will "only" lose a maximum of $4700, whereas you can lose a maximum of $15,100 with the $25.

Hope that helps I guess....

**Broken Arrow** · 10-15-2010, 12:44 PM

Originally posted by Scanner View Post

Hey, I am not sure of BA's tone here either KTP, but I am with you.

My tone, if there is one, is of caution.

If you are going to speculate (or are commanded to), I am not sure why you wouldn't do anything except options or futures.

With the market being so efficient due to capitalization and there being no such thing as an "undervalued" or "overvalued" stock, why buy a speculative company (and Microsoft is anything but a speculative stock, I guess - it's kind of an oracle) stock and hope it goes up?

It seems like gambling on a stock here and there is kind of passe with how the market has evolved.

Like many things we have talked about in the past and here, I respectfully disagree.

**KTP** · 10-15-2010, 12:55 PM

[QUOTE=Broken Arrow;272612]My tone is one of caution. I think it's dangerous to jump straight into options without really having a good idea of how it works. This trade gives me that impression.
[QUOTE]

No, you are correct that I did not have a excellent understanding of how options worked. I have a little bit of knowledge, which can be dangerous. I just felt strongly enough about this one trade that I decided to jump in (just a little bit...I didn't buy $15,000 in options).

It is kind of exciting either way. I am glad I did it inside the IRA which I consider play money.

**Scanner** · 10-15-2010, 01:07 PM

Well BA,

We all know that speculation is an important part of a retirement portfolio (college could be debated).

It's where I think they have studied that 50% of your gains is to be had over a lifetime (along with losses) - on that 10% we are supposed to speculate with.

What alternative would you suggest to KTP for the speculative part of his portfolio? Letting some money ride on a stock? I can see a lot of downside risk for that, but not much upside reward, unless you get a stock trading around $5-8/share maybe.

With options, I can at least see the upside reward.

I know I speaketh in generalizations but to me, if you are going to risk, then risk!

**KTP** · 10-15-2010, 07:27 PM

I just wanted the fun of controlling a quarter million dollars of stock with less than $5000 at risk. I treat this IRA as my ultra high risk portion of our portfolio but it represents a pretty small fraction of our investments. I'll take the ribbing or whatever if the stock tanks and I end up losing my $4700. No need to attack each other or come to my defense as I admit I am a newbie. It seemed pretty safe buying calls. One day I might look into hedging my other investments by selling covered calls...I would have to do some calculations to see how much that could help.

**Broken Arrow** · 10-15-2010, 10:16 PM

KTP, I apologize if I am being rude with my comments here. I mean nothing bad. It's just that this is options trading. We need to be careful. That's all I'm saying.

Scanner, I'm sorry, but you're wrong. But you know what? I'm not going to get into it with you. I'm just not. We've already had plenty of discussions in the past, and somehow, it doesn't seem to matter what I say because, somehow, you've already decided I must be one of the bad guys out there. One of those shadowy "Centrists" who is somehow against apple pie and Fourth of July or something, and therefore, someone you have to defeat in holy internet battle.

Ok. That's fine. But as I've already said before, I really am just a guy. My life is kind of messed-up, I struggle just like anybody else, and all I am trying to do here is help out in my own little way. Feel free to do whatever you guys want with your own money. There is no conspiracy. I am not evil. I am only human, and I get tired of all this posturing.

Maybe my real life stress is getting to me, and I'm pretty sure that I'm going to regret typing this in the morning. Maybe I should step away from the forums for a while.

**gambler2075** · 10-16-2010, 07:13 AM

My 2c worth is that it is entirely possible to speculate without using options. I have never traded any options, and I have done quite well speculating in small cap stocks. I think the problem with options is that things tend to take longer than you expect, and of course time is a factor in options where it is not with stocks.

If you make an options bet, and you are wrong, and you wait it out until the end, you lose the entire position. If you are wrong in a stock bet, you usually do not lose the entire position, especially if you are not leveraged. I learned my lesson about leverage a while ago (although it took me several times to learn it

) and now I do not buy more stock than my account is worth.

I think you can be plenty speculative in low market cap stocks if you really do your homework and see how the big banks/analysts are trying to screw the little guy, and go contrarian to them. Look at BP when it was 26 bucks... it was ridiculously underpriced and the media and the big banks were playing with the fears of the retail holders to get them to capitulate, which they did. Now the stock is up over 50% from those lows. The moral of the story is to never listen to the analysts, and usually I try to take that one step further, and go contrarian to what they are doing.

Just think about it... if you had the power to make people buy and sell by upgrading or downgrading a stock, I don't think it would take a rocket scientist to figure out how to make money from that. All you need to do is downgrade a stock (like BP at 28$) by talking up bankruptcy risks, blah blah blah, and then meanwhile you are loading up massively. Then, when you have gotten everyone to give up, you just start talking about the good aspects, and the stock runs up massively. Then you sell all your shares. A simple concept, if you think about it. I used to get angry at the analysts because I knew they were intentionally screwing with the little guy, but now I thank them for the buying opportunities they are making.

g

market speculation for October