Explanation of Chart - US STEEL




Provided By optiontradingstrategies.org

In the examples that I use as illustration, people might say that I am using only favorable ones. I am using not only examples of options that were profitable to the buyer but also those where the buyer of the option was wrong and lost his premium money.

A look at the accompanying chart of U.S. Steel common shows that it broke from 72 in the second week of July, 1957, to 48¼ by the third week in December of the same year. From 48¼ it rose in almost a straight move to just under 100 in January, 1959.

In the examples that I use as illustration, people might say that I am using only favorable ones. I am using not only examples of options that were profitable to the buyer but also those where the buyer of the option was wrong and lost his premium money. Some of the examples are taken right from the records and are options that were actually sold at the time and at the price mentioned.

On July 23, 1957, when U.S. Steel was selling at 70½, 6-month-and-10-day Puts were sold at 70 ½ for $475 per 100-share Put. The Puts expired on February 3, 1958, and on that date the stock sold at 56. The Put contracts could have been closed out on that date with a profit of $1,450, less the cost of the option and commissions for buying and selling the stock. Of course, during the life of the option, the stock sold for as little as 48¼. Had the holder of the option seen fit to close out his option in mid-December, he could have bought stock at 49 and exercised his option before expiration, showing a profit of $2,150. Even if the man's judgment of the market had been wrong—but it wasn't—his loss would have been limited to the cost of the Put option.

If someone had been farsighted enough to buy Calls on U.S. Steel in mid-April, 1958, when steel was selling at 56, his profit could have been enormous. On April 16, 1958, Calls were sold at 57 5/8, expiring in 6 months and 10 days (October 27, 1958), for $450 per 100-share Call. On October 27 the stock sold at 87, and if the Call had been closed out on that date, the profit would have been $2,937.50, less the cost of the option and stock-exchange commissions for buying and selling the stock. The owner of such a Call does not necessarily have to sell the stock after he Calls it—he may see fit to Call it and carry the stock, looking for a higher price at which to sell it. Of course, in calling the stock and carrying it, he will be required to margin the stock properly with his stock-exchange house.

option trading strategies

If the customer wishes to have the option exercised and it happens to be a Call on XYZ at 70, his instructions to his stockbroker will read: "Exercise Call on 100 XYZ at 70 expiring October 24 and sell stock at market;" or if he wishes to exercise his Call contract and carry the stock in his account his instructions should read: "Exercise Call on 100 XYZ at 70 expiring [date] and carry stock in my account."

Of course, if he chooses to carry the stock, he will be obliged to margin it according to stock-exchange requirements. If he exercises the Call and at the same time sells the stock, he will be required to deposit only 25 percent margin or $1000, whichever is greater.

It might be of interest at this time to explain that the option-dealer does not operate on a commission basis, but his profit is made in the difference between what he pays for an option and what he receives for it. An option-dealer having an order to buy an option for $500 will probably bid $450 to the maker of the option, which he is going to sell for $500, and therefore make about $50 on the transaction. It may be possible sometimes to buy the option for a lesser amount, and in that case the option-dealer's profit will be larger. Conversely, the broker may not be able to buy the option for less than $475 in order to fill his order, and therefore his profit would be $25. So much for the various uses of the Put contract.

IMPORTANT: Interested In Trading Options? Discover How To Trade Options Market With A Secret Trading Formula Only a Handful Of Traders Know. Click Here For Our Options Trading System.

 

copyright 2005 optiontradingstrategies.org
www.meta-formula.com