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Stock Picks Bob's Advice
Saturday, 27 August 2005
A Reader Writes "More questions though:"
Hello Friends! Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice. As always, please remember that I am an amateur investor, so please consult with your professional investment advisors prior to making any investment decisions based on information on this website.

After writing my note on options, I thought I might be done with this subject :), but Josie wrote right back and has another question:
Hi Bob - Thanks so much for the detailed explanation! More questions
though:

Should I wait until December '05 to "Buy to Close" my position or should I
do this now? When "buying to close", I'm not buying the actual GTI stocks @
$5 per share, right? I am just essentially closing my position to get out
of this mess, correct?

My account is showing "-$95" right now for this transaction. I presume that
is what will be taken out of my account if I close out of this position, is
that right?

Live and learn...my life's motto...which sometimes costs me a lot... :(

Thanks again Bob.

Josie
Josie, I must first re-emphasize that if I am an amateur with stocks, I am a real beginner as far as options is concerned! But let me give this a shot. (Again, if there are some real options traders and professional investors out there reading this, please feel to chime in with your thoughts...either right here on the blog or email me at bobsadviceforstocks@lycos.com with your information.)

Apparently, you wrote a contract on Graftech with a strike price of $5 and an expiration of December, 2005. In general, your best bet after writing a contract, is for that contract to expire worthless, you still own the stock and you can then pocket the difference. (Your proceeds for the sale of the contract)

I really cannot tell you what to do with this contract. I have about zero experience in this type of trading, and could not, in any case, predict what will happen to this trade.

But I think we can in general speculate about what might happen under different scenarios to get a feel for your situation. For instance, we know that GTI closed at $5.41 on Friday, August 26th, 2005. Thus this contract is "in the money" and is likely to be exercised come the expiration date. (If the stock stays above $5.00, the contract holder, the individual who bought the contract from you, could exercise the call option and purchase GTI for $5.00 and would then receive the difference between the $5.00 and the market price of GTI if he sold the underlying shares, which would be $.41 (if it were today) times 100....the number of shares per each contract, which would work out to a $41 profit/contract for him (minus of course the actual price he paid for the option).

However, if the stock closes out this period under $5.00, then the option is said to be out of the money and will expire worthless, highly unlikely to be exercised.

You are correct that "buying to close" is not about buying any stock. You are in essence buying the option contract from someone else, so that it is a wash in your account, and the risk and benefit is transferred from your account to the new account which sold you the option.

Not trading options myself, I am not sure about the "-$95" figure, except to assume that the stock price has actually appreciated about $.95/share from your time of selling the contract (there are actually two components to a gain on an option like this, the portion that is "in the money" and the speculative portion which is 'time-related'...as you get closer to the expiration date, in general, the speculative portion of the option diminishes to zero and the value instead becomes the actual difference in price between the market price and the 'strike-price'), and to replace the contract, that is to "buy to close" will cost you $95 more than you made on your sale.

This last is just my guess, and not knowing your particular situation, and not knowing the time you purchased it, etc., and quite frankly, not being a real expert at this stuff....well just take that bit with a 'grain of salt'.

In conclusion, these type of transactions are complex and highly risky. I avoid options as much as possible even though the leverage associated with these contracts can produce fabulous results. The downside is also quite impressive.

I hope that added some insight into your particular situation. Again, thanks for writing!

Bob


Posted by bobsadviceforstocks at 3:08 PM CDT | Post Comment | Permalink

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