theclemsonkid
Member
I don't really know the first thing about stocks and investing, but I have been dabbling in the basics the past few weeks. I have a friend who claims he makes a small living off selling and buying what he calls the "put option" on stocks. Apparently instead of buying a stock outright and going along for the ride, you are able to buy 100 shares of any company or fund you want, at a small premium, which basically gives you the right, but not the obligation, to sell the stock at the locked in "strike" price over a certain amount of time.
He gave me an example yesterday. Said he bought the call option on 200 shares of a silver fund with a strike price of $27.00, at a premium of $4.21 a share set to expire Jan 18, 2014. So, at 200 shares at $4.21 he spent $842 to buy that stock at that price for the next year.
I guess the theory is that let's say silver goes up, and the stock stays consistent with the troy ounce price, and rises to around $45.00 an ounce (which this particular stock mirrors the price of silver on the open market). That stock he bought the rights to for $842 now has a market value of ($45 x 200 shares) $9,000 versus the initial value of ($27 x 200 shares) $5,400. So of course he can buy the stock at the $27 he was locked in to, then turn around and sell on the open market for a very nice profit of $3,600.
The downside of course, is that let's say the price of silver drops from $27 an ounce to $15 an ounce and the stock does likewise. At the end, you now have the right to buy stock at $27 a share, but the open market would only pay you $15. So basically you just bite the bullet and take the $842 loss.
Again, I'm new to this, but it seems like the whole "option trading" thing gives you the chance to get decent returns with a low percentage risk if you don't win.
Anyone out there do anything like this, and if so, do you have any good places to learn a good foundation?
He gave me an example yesterday. Said he bought the call option on 200 shares of a silver fund with a strike price of $27.00, at a premium of $4.21 a share set to expire Jan 18, 2014. So, at 200 shares at $4.21 he spent $842 to buy that stock at that price for the next year.
I guess the theory is that let's say silver goes up, and the stock stays consistent with the troy ounce price, and rises to around $45.00 an ounce (which this particular stock mirrors the price of silver on the open market). That stock he bought the rights to for $842 now has a market value of ($45 x 200 shares) $9,000 versus the initial value of ($27 x 200 shares) $5,400. So of course he can buy the stock at the $27 he was locked in to, then turn around and sell on the open market for a very nice profit of $3,600.
The downside of course, is that let's say the price of silver drops from $27 an ounce to $15 an ounce and the stock does likewise. At the end, you now have the right to buy stock at $27 a share, but the open market would only pay you $15. So basically you just bite the bullet and take the $842 loss.
Again, I'm new to this, but it seems like the whole "option trading" thing gives you the chance to get decent returns with a low percentage risk if you don't win.
Anyone out there do anything like this, and if so, do you have any good places to learn a good foundation?
