Option Chains & buy examples

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United Air Lines (UAUA) has recently hit a 52 week high of 14.07 per share.   I bought both put and call options highlighted below in the option chain.  Personally, I feel the stock will go to at least 9.00 per share by late February, but there is talk on the street about heavy "call volume", meaning that popular opinion says the stock will go to 20.00.

Below, I will talk about possible scenarios based on 1 option contract in either direction, referring to the the markings I have made on the option chain for UAUA - expiration Feb. 2010. ( my actual quantity will not be discussed ).




click to enlarge

Put Option: (right side in the purple box)

Current trading price of UAUA is $13.25

I selected UALNO, strike $8.00, for February 2010.

I paid $5.00 for control of 100 shares of UAUA until February 19, 2010 ($0.05 x 100 = $5.00)

This is how it would look in my portfolio:


click to enlarge


If the price of UAUA continues to rise, I will lose $5.00

If it falls, the value of my option will go up (which I can sell at any time)

If it falls to $7.95, I am even money (I paid $5.00, can buy 100 shares for $795 and sell them for $800)

If it falls to $7.00, I can exercise the option, buy 100 shares for $700, and sell them for $800.  The profit would be $95.00 (I paid $5.00 for the contract and made $100 on the trade - $100-$5=$95)


Call Option: (Left side in the blue box)

Current trading price of UAUA is $13.25

I selected UALBY, strike $17.00, for February 2010.

I paid $35.00 for control of 100 shares of UAUA until February 19, 2010 ($0.35 x 100 = $35.00)

This is how it would look in my portfolio:


click to enlarge

If the price of UAUA continues to fall, I will lose $35.00

If it rises, the value of my option will go up (which I can sell at any time)

If it rises to $17.35, I am even money (I paid $35.00, can buy 100 shares for $1700 and sell them for $1735)

If it rises to $18.00, I can exercise the option, buy 100 shares for $1700, and sell them for $1800.  The profit would be $65.00 (I paid $35.00 for the contract and made $100 on the trade - $100-$35=$65)

If I like I can keep the shares and hope it goes to $20.00 per share or even higher.  After exercising my option, I can treat UAUA like any other stock purchase.


Summary:

The worst thing that could happen is a situation where UAUA trades flat over the next 35 days.  Because I bought both, I would make nothing on either.   I could sell them both before expiration and would lose the commissions paid.

What will probably happen...
The stock will develop a trend in the next week or so, and I will will exit one of the option positions (or just let it expire worthless).

Note:
I would not recommend buying both Puts and Calls at the same time.  I have done it only because my belief is quite opposite than the consensus.





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