c12 JWBT016-Busby September 30, 2008 14:21 Printer: TBD
CHAPTER 12 Options Strategies to Make Money
I
have traded options for many years. You will recall that it was an op-
tions trade that caused me great grief in October 1987. Even though I
still trade options, I use a different approach. That is, I respect risk and
make much smaller, safer trades. Today, I am far wiser and would never
dream of trading 1000 or so naked options. The gray on my head attests to
the wisdom I have gained as each year has passed.
An option is a contract that gives the owner the right but not the obli-
gation to engage in a future transaction of an underlying security at a spec-
ified price on or before a specified date. The option contract may be exe-
cuted if the underlying security reaches the specified price or strike price
set forth in the contract. For example, if the strike price for an option is $35,
when the per-share stock price reaches the magic $35 mark, the strike price
has been hit. If the option has not expired, the contract may be executed.
Options are unlike most other financial products in that options expire
if they are not exercised. Options contracts for equities expire on the third
Friday of their expiration month. The contract must be executed on or be-
fore the date specified in the contract. If the option is not executed on or
before the expiration date, it becomes useless and is null and void.
There are two big categories or types of options: calls and puts. A call
is a contract that allows the buyer to “call” the stock away from the seller at
a specified price or strike price. For example, if someone buys an October
35 GE call, he has the right to “call” the stock away from the seller at the
strike price of $35. If the strike price is hit, the call allows the buyer to
obtain the stock at that price. A put is a contract that allows the buyer to
“put” the stock to the seller of the contract at a set price or strike price. If