time value)īuying the Middle for Realistic GrowthThe beanstalk only grows near the tip. Speculation based on where the beanstalk could grow above its fair value based on takeover rumors or unrealistic earnings projections (a.k.a.Area between trunk and stock’s fair value.Growth area, based on expected future cash flows.Solid as a rock, based on cash, tangible assets, and worst-case cash flows.Visualize Stock as a Beanstalk with Three Parts:1. When you buy stock, you are required to devote a large portion of your precious investment capital to the trunk portion of the beanstalk despite its inability to do anything. These sections have no growth and are like immutable rocks. The roots and the trunk of a real beanstalk near the ground will always be there and don’t change. 11Placing an Option Trade with Your Broker. 10Options Spreads: Buy and Sell Options Simultaneously. 8Buying Call Options as a Stock Replacement Strategy. Table of ContentsSetting Up Your Options Account. It’s a nice story, but in options trading, people who believe in fairy tales don’t make In that fairy tale, a boy named Jack plants some magic beans and a beanstalk grows up to the clouds. Jack and the Bean “Stock”I like to think of stock in terms of aīean “stock.” Everyone is familiar with the fairy tale Jack and the Beanstalk. The trader with virtually unlimited flexibility to tailor his directional and temporal outlook concerning a stock and do so at the lowest possible cost. In contrast, options allow you to limit your capital at risk to only those portions of a stock’s price movement that you want – and for only the period of time Voicemail when all you really want is a local dial tone. Stock is a very blunt investment instrument that’s sort of like being forced to buy a telephone package of local, long-distance, call waiting, caller ID, and That make up a stock “molecule.” When you buy a stock, you areīuying exposure to the full range of a stock’s price movement – upĪnd down – for an unlimited period of time. In chemistry terms, call and put options are the “atoms” Compared to stock, they are very inexpensive. Sell 100 shares of that underlying stock at a certain price on or before a certain date. Each option contract represents the right to buy or Theyĭerive their value from an underlying “something else” – typically the value of a stock or stock index. Stock options! Stock options are derivatives. Welcome to Options for Income and the wonderful world of 11 Placing an Option Trade with Your Broker. 10 Options Spreads: Buy and Sell Options Simultaneously. 8 Buying Call Options as a Stock Replacement Strategy. It’s a nice story, but in options trading, people who believe in fairy tales don’t make Table of Contents Setting Up Your Options Account. Jack and the Bean “Stock” I like to think of stock in terms of a bean “stock.” Everyone is familiar with the fairy tale Jack and the Beanstalk. This provides the trader with virtually unlimited flexibility to tailor his directional and temporal outlook concerning a stock and do so at the lowest possible cost. In contrast, options allow you to limit your capital at risk to only those portions of a stock’s price movement that you want – and for only the period of time you think necessary. Stock is a very blunt investment instrument that’s sort of like being forced to buy a telephone package of local, long-distance, call waiting, caller ID, and voicemail when all you really want is a local dial tone. In chemistry terms, call and put options are the “atoms” that make up a stock “molecule.” When you buy a stock, you are buying exposure to the full range of a stock’s price movement – up and down – for an unlimited period of time. Each option contract represents the right to buy or sell 100 shares of that underlying stock at a certain price on or before a certain date. They derive their value from an underlying “something else” – typically the value of a stock or stock index. Options for Income Strategy Manual By Jim Fink, CFA Benefits of Stock Options W elcome to Options for Income and the wonderful world of stock options! Stock options are derivatives.
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