Monday, October 8, 2007

Buying Options

I'm still researching options. I found this chart to be helpful in comparing brokerages.

Some more useful information (from MorningStar):

If: Market overshoots and the prices fall below their fair value.
Then: Sell put options(shorting an overpriced "asset", while going long on an underpriced asset (the shares of the stock).
So: The downside of this strategy is reduced because even if the option expires in the money, the investor will buy the underlying stock at a significant discount to its fair value estimate and at a discount to the share price equal to the amount of the option premium.

I still need to learn more about it. Options are still somewhat confusing to me. Calls, puts, writing, buying, premium, strike, duration, and all those crazy strategies like that sound like they're right out of Street Fighter. e.g. Split Strike Combo! Hadoken!

So if I were to write a put on PCS. I promise to buy the share at a out of the money strike price. Buy 1 contract put= 100 shares. Get money for premium. If purchaser exercise- I get to buy at K-prem. But the bid ask spread for the option is so big that I don't even know how to do this. And what happens if the stock dips below the strike? How will I know when the buyer will exercise it?

More info on options:

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