I bought my first Option!

15 Mar

Trust me, I’m no expert in Options.  I have like $600 sitting my TFSA account that I would like to play with.  After talking to my friend, he did make out some good points about investing a good chunk of your own money into a stock.  Why invest thousands of dollars only to gain 10%?  With call options, you can invest little money and gain 100% if your bet is right!  The downside is that there is a time expiry date on these bets.  As the time nears, if your strike price is above the current price… your premium will get smaller and smaller cuz no one will want to buy your strike price.  Your call options will be deemed worthless and you lose out.

I bought one contract of CLF.  One contract equals to 100 shares of buy the call price.  Buy to open a call price of $2.94 to strike at $72.50 by April 21, 2012.

What am I trying to accomplish here?  Here are the facts:  I am betting CLF by April 21st will be trading above $72.50.  Let’s say by April 21st, CLF is trading at $80.  Traders will pay a premium to buy in at my price of $72.50 so they can exercise that price.  That’s where I benefit for a profit.

The option fees are higher at $9.95+$1 per contract at Questrade.  So I have to sell this option $3.159 to break even. 

Right now, I am at a $10.05 gain in a matter of minutes, but of course this can dramatically change if CLF is going south instead of north.   I only put down $304.95 of my own money.  My target price is to sell at $5.00.  That would be a good profit of $206 less $21.90 in commissions.

This will be a good little test run for me to dip my toes in the world of option trading.

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3 Responses to “I bought my first Option!”

  1. Alex March 15, 2012 at 2.33 #

    statistically, 3 out of 4 options expire worthless, so generally it is better odds to sell options rather than buy them. covered calls (selling calls on stock that you own) or cash secured puts (selling puts at a level you’d feel comfortable getting long the stock itself) are 2 fairly conservative methods to use options to enhance returns.

    to your friends point, making 10% on thousands of dollars seems pretty good to me! depends on the time it takes i guess =p

  2. agentfang March 16, 2012 at 2.33 #

    Options is definitely riskier than holding onto a stock. These are bets for or against for a stock to go in either direction. What my friend meant was that putting money into options is a quicker way to make profits with little money down vs buying 100 shares of a stock.

    I don’t know the other concepts of options that you have mentioned, that’s too complicated for now. I need to do some brush up before conquering this option quest. That’s why I’ve only put down $300 instead of $600 into that CLF option 🙂

  3. Alex March 19, 2012 at 2.33 #

    yea, its good to get some experience with it. just be disciplined. good luck!

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