Options

For the ones that followed my advice from yesterday and bought the 4100 put Feb-09 on the FTSE can take nice profit of 25% in less than 12 hours.

The FTSE starts the day on the red and now the option worth 74, 15 points more than yesterday night – 25% profit.

Hi all,

if you believe that by the end of the week the FTSE 100 will head to the 4000 direction (which I do) this is the time for you to but the 4100 put of Feb-09 which expired on the 20/02 10:00.

At the moment the price is 59 while the FTSE stands on 4134. Another red day tomorrow and the option will worth much more. You can easily make 20%-30% with low risk.

For example in the morning when the FTSE was higher the price was 46 in the evening when the FTSE went down the price of this option jumped to 59. 28% in less than a day.

It is quite common to go long or short on an index like the FTSE. But is it smart? would it be better to use options instead?

Lets check… The FTSE closed today at 4234. Now lets say you want go long and you think that the bottom is around 4000. So you open a position with stop loss around 3980. Meaning you are risking 254 points or 6%. Your aim is to have 10% profit or 420 points (4654)
Now lets check different scenarios:

1. The FTSE goes to your direction and by 20 of April it reaches your target and close the position with 10% profit.
2. The FTSE goes to your direction but doesn’t touch your target and you decide to close the position somewhere in the middle with 5% profit
3. The FTSE goes down and hit your stop loss. 10% loss

Now lets check what would have happened if instead of buying the index directly you would bought an option. The call option of 4650 for April cost 64 points to buy. Lets check the scenarios again:

1. The FTSE goes to your direction and reaches your target. In this case your option will be worth much more. It depends how close the expiry date is, but in some cases your option could worth 300 points. 468% profit.
2. The FTSE goes to your direction but not touches your target. Still your option will be worth much more. So if for example in beginning of March the FTSE will be around 4450 your option will be worth around 120 points. So you sell it before it way before it is due to expired. 100% profit.
3. The FTSE goes down – your options worth nothing and you lost 64 points or 100%.

As you can see your profit can be much more and the loss is less (although you lost 100% you risked less points) but more important is that the market moves up or down. With option you get the chance to stay in the game with low risk even if the market goes against you. Because you risked only 64 points. If you bet on the FTSE directly and decide to take the risk without using stop loss you risking much more and you could end up losing lots of money. With an option you just limit your potential losses and maximise your profits.

If you use it smart you can gain nice profits.

Hi all,

To be honest I thought that Wall st will react better to the new president. I thought that Mr Obama will come with a great speech that will carry Wall st with great optimism all the way up. I was wrong.

When Barak Obama made his speech, the Dow was around 8150 soon after it went down to 8100 and then all the way down to 7950. Great start. So if Obama didn’t understand the task in front of him now he does.

But with banking sector near collapse some analysts talk about the Dow around 6000 and the FTSE has 2 at the beginning. My advice is calculate your risk. If you still want to go long on the market buy put option. Just in case. But put options are expensive these days because no one can see good news in the near feature.

I know that I am willing to take a risk and going to buy Barclays if they touches 65p. At the moment it is 72.95 so I am not far. But this is for long term investment. I think they are one of the few that have a chance to get it through, and if they do, the sky is the limit for this share.

Down. Don’t be mistaken by the strong opening of 2009. More bad news will come and although the market was indifferent about them during December it is unlikely that investors will continue risk their money.

You can check the options prices to see the direction. At the moment the FTSE100 is 4448. The 4000 put for March will cost you 152 points, while the 4800 call for March is just 109 to buy although the FTSE is closer to the call than the put! This means one thing, the direction is down.

How much down? This is the million dollar question. It is all depends how bad the news will be.