Your Questions About Money Making Stocks For 2010

Linda asks…

What happens to a company’s stock options when the company is acquired by either a private or public company?

In other words, if I buy a call option that expires in January 2010, and the company is aquired before that time, what happens to my right to buy shares in the acquired company? Am I compensated for the call option at the time of the acquisition? If so, at what price? Does my option (and right)disappear?

If the acquiring company is a publicly held company, I assume that the options just convert to an equivalent stock option in the acquiring company. Is this correct?

John answers:

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For exchange traded options the contracts are adjusted to make the underlying be the same thing the owner of 100 shares of the stock received.

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Example 1:

If the shares were bought out for $87 per share your call option would be converted to make the underlying $8,700. This means if your call had a strike price above $87 it would effectively become worthless, but if it had a strke price below $87 it would effectively become worth a fixed amount. If the stirke price was $65 it would be worth $2,200 but you would have to exercise the option to receive the money.

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It is correct if the owner of 100 shares of the acquired company received shares of the acquiring company.

Example 2:

If the buyout gave the owners of the acquired company 0.48 shares of the new company for each share of the old company in the buyout, the underlying for the option would be adjusted from 100 shares of the acquired company to 48 shares of the acquiring company.

For examples of contract adjustments from past acquisitions, see

http://www.cboe.com/tradtool/contracts.aspx

John asks…

Why should i invest in the stock market?

the stock market lost money from 1999 to 2010.

what other periods of five years or more inthe last 90 years has it lost money, i know there has been several.

John answers:

Because the banks almost want you to pay them to hold your money.

You can make a lot of money on stocks if you pay attention. Do not buy & hold forever.

Get a Scottrade account & do some reserch on about 10 stocks that pay a dividend. Study the ups & downs over the last 6 months. Look for a dip in price & buy. Then wait until it goes up a little & sell it. Dont get greedy but you can make $500 her & there a few times a week. If you have to hold onto it for a while before it goes up at least it pays a dividend…

Good luck

Hey David: At least if you had invested your SS $ in the market you would have about 70% of it now instead of minus nothing the government has saved.

Helen asks…

How can I make money trading disney stock?

Does anyone know any good buy and sell signs for trading Disney stock?

John answers:

Disney is a very range-bound stock so you may want to “ride the range.” For most of 2007 to 2010 it has hovered (or “hoovered” as Walt Disney would have called it, he was notorious for mispronouncing words and insisting he was right, and “hoovered” was one of his favorites) between 30 and 38. The only exception is the period of time in 2008 when all stocks were way down. At 33.25 right now, it is a little high in the range, I would wait for a pullback to 32 or at least 32.25. Then sell at 35 or 36, and repeat. You could have done this three times since May for a net total of about 30% earnings, 10% each time.

Since DIS is such a huge company there isn’t any events like a great movie, theme park opening or stuff like that to drive the price too much.

Ruth asks…

How to hedge against a move against me in a credit spread?

Say I enter a bull put credit spread (neutral to bullish outlook). If the stock starts to move lower, would it effectively hedge the position to sell a bear call credit spread at the same time? I think this would amount to a condor, correct?
Or would it be better to do the reverse, and open the condor first, then close the losing position?

John answers:

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The first thing to do is simply to avoid panicking. Look at the charactaristics of the spread after the move against you and compare those characteristics with what you want. If they are not the same, adjust the position to bring the characteristics around to what you find more deisrable.

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Since you said “neutral to bullish” I am assuming you are using out of the money strike prices. I am also assuming it is a vertical instead of a diagonal spread and that the number of long contracts equals the number of short contracts.

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That would hedge the position by reducing the delta risk. How effectively it hedged would depend upon the strike prices and the credit received.

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Assuming both the strike prices in the bear call credit spread are above both the strike prices in the bull put credit spread you would have created an iron condor by legging into it.

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If you start with a bullish spread you are probably trying to profit from an increase in the price of the underlying. If you start with an iron condor you are probably trying to profit from your projection that the implied volatility of the options is too high. I would not call one “better” than the other. They are different spreads based upon different projections.

If you adjust a vertical bullish spread into an iron condor it should be because your outlook has changed and you no longer want to be (as) bullish.

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Some new traders tend to adjust too frequently. Frequent adjustments can reduce your profit or even trun a profit into a loss. It is easy to be whipsawed in the price of the underlying suddenly reversed direction. If you want to make a profit, you have to accept some risk. Of course, there is the other extreme as well, the traders who refuse to accept that they made a mistake and refuse to adjust at all.

One other possible adjustment I will mention is simply adjusting the delta with the underlying. If your example, that would mean shorting a smaller number of shares to offset some or all of the loss from the spread if the underlying stock continues to go down.

There are a nearly infinite number of other possible adjustments. Here is an example where I have been using diagonal spread to adjust:

October 2, 2008

Bought 50 GM Jan 2010 $7.50 puts @ $3.86
Sold 150 GM Jan 2010 $5.00 puts @ $2.37

Total Initial Credit = $16,250
Max Profit Possible = $28,750
Max Loss Possible = $21,250
Break even point at expiration = stock at $2.125

December 1, 2008

Bought 20 January 2010 $17.50 puts at $15.18
Sold 20 December 2008 $2.50 puts at $0.48

Total debit $29,400

December 17, 2008

I rolled the 20 short puts from the first adustment from December to January.

Bought 20 December 2008 $2.50 puts at $0.05
Sold 20 January 2009 $2.50 puts at $0.61

Total credit $1,120

January 7, 2009

I closed (bought) the 20 January $2.50 puts at $0.04.

Total Debit: $80.00

January 8, 2009

I sold (wrote) 20 March $2.50 puts at $0.71.

Total credit: $1,420

This effectively completes rolling the January $2.50 puts out to March.

March 2, 2009

Sold (to close) 20 January 2010 $17.50 puts at $16.55

Total credit $33,100

March 5, 2009

Bought 6 June $6 calls at $0.03
Bought 17 September $6 calls at $0.05
Sold 6 April $4 calls at $0.05

Total debit $73

March 6, 2009

I completed the spreads I started yesterday with the follow trades today.

Bought 14 June $6 calls at $0.03
Bought 3 September $6 calls at $0.05
Sold 20 April $3 calls at $0.06
Sold 14 March $2.5 cals at $0.05

Total credit $133

Consolidating yesterday’s trades with today’s:

Bought 20 June $6 calls at $0.03
Bought 20 September $6 calls at $0.05
Sold 20 April $3 calls at $0.06
Sold 14 March $2.5 cals at $0.05
Sold 6 April $4 calls at $0.05

Total credit: $60

I will continue to update the thread with my future adjustments to this spread at

http://messages.yahoo.com/Business_%26_Finance/Investments/threadview?m=tm&bn=4686677%23optiontradestraderecommendations&tid=3362&mid=3363&tof=1&rt=2&frt=1&off=1

Mary asks…

How many stock positions do I need to trade daily to make a living?

On average how many stock positions do I need to have open at the same time to make a living off of them?

John answers:

If that is really a question you are asking you shouldn’t even think about it. It’s not about the number it’s about how well you make money on the trades that you do make. For instance I made $130 on one trade today and lost $67 on another but the win or loss depends on how much I have invested and how much the stick rises or falls. No two days are the same so an average is a meaningless figure.

2010 will not be a year when a rising tide raises all boats so you’d better be very smart at picking stocks or you will lose. Even a seasoned trader might struggle to make 5% this year so let’s say you manage to meet that and want a living wage (say $40,000 to be conservative), you need $800,000 invested all year to make that. I’m guessing but it sounds like you probably don’t have that kind of dough and if you do you inherited it so don’t waste it.

You could trade options and increase your leverage and therefore returns and losses that way.

Don’t forget trading fees that eat away at gains and increase losses especially for small amounts invested.

Trading isn’t a way to make money for nothing so don’t go there unless you want to go broke.

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