Let's Take a Look at Energy
Traded on the AMEX is the Select Energy Sector SPDR with a symbol of XLE. It is currently trading at $69.54. That, to many people, represents a lot of dollars per share and when one purchases 100 shares, it comes to $6,954 plus commission. There is an alternative way to invest in securities other than directly in the traded shares.
The alternative of options provides a leverage. Leverage, as many of you know, is the ability to have control over a valuable asset using only a small investment of dollars in comparison to the market value of the asset. Thus, using an option, one can purchase the opportunity to buy 100 shares of XLE at $70 until September 22, 2007, today for only $320. This would be a "Call Option." It gives the opportunity, not the requirement, for a person to purchase (exercise the option) to purchase shares.
Note that in the example, there are features of the option which impact upon its value. The first is the market price of the underlying security. In this case, today's market price of XLE. The second is the length of time that the option has left to be executed. In this case September 22, 2007. In dealing with options, one must always realize that the time value decreases as the execution date nears. So in our case, the September options on XLE will have less time value remaining as each day and week go by.
In option terminology, there is the expiration date (September 22) and the exercise price ($70 per share). Options are written in contracts for 100 shares. In our example, one would purchase our specific option (XBTIR) @ $3.20 X 100 = $320.
One does not have to exercise the option to purchase the underlying security to make a profit. Often, as the market price of the underlying security increase, the market value of the option will increase, as well. If the purchaser of the option sees this increase in value and wants to sell and take the profit without exercising the option, he can do this.
As with other securities, the option can lose value if the underlying security drops in price. Options also have the additional risk of loss of time value as the expiration date approaches. This we find that options have an additional risk that many people are not willing to take. Beware of these facts!
Also, trading in options requires special arrangements with the broker. One must have a margin account and must complete special forms for trading in options. It is not for everyone, but can be an advantage for those with risk tolerance. There is in addition to the advantage of leverage the advantage of knowing precisely the amount of dollar risk one is taking. That is, the only risk is the purchase price of the option + the commission. Options can become worthless as time expires and the price of the underlying security does not rise.
Before leaving the subject of options, there is another type of option which is traded. The preceding discussed only the Call option; that is the opportunity to buy the underlying security at an exercise price until the expiration date. Think of a Call option being the opportunity to call for a stock. Call options are purchased only when one believes the underlying security will increase in value within the time allowed. On the other hand, if one believes the stock will decrease in value, he uses another type.
This type is the Put option which conveys the opportunity to sell the underlying security at the exercise price until the expiration date. Thus, one can put (sell) the stock until the option expires. This option would not be exercised unless you owned sufficient shares to sell. However, if the stock price decreased, the option would increase in value and could be sold for a profit.
Trading in options is considered to be with greater risk than buying and selling shares of securities. So Buyer Beware!
This has been presented to introduce you to options, but also, I wanted to share with you some of my thoughts on energy and specifically the XLE. It is my belief that the middle east situation is not going to cool very soon. Were it to expand in any way, petroleum delivery from the area would be reduced. Maybe it would be reduced greatly. In this case, the price of all natural energy resources would escalate drastically. The resultant impact on XLE would be a substantial increase in market value. We could also see gasoline at the pumps exceed $4 per gallon. Not good, but a possible opportunity to profit from the situation.
I have bought and am seriously considering buying more Call Options on XLE. You might want to just add to your holdings, if any, of XLE. I prefer the Call Options for the leverage advantage. Here are some of the options under consideration by me. September $70 (XBTIR) @ $3.20; $71 (XBTIS) @ $2.65 and December $70 (XBTLR) @ $4.90; $71 (XBTLS) @ $4.40. Maybe the market price of each will go down. I have not issued the order/orders yet. I always use a Limit order for options when buying or selling.
Gold is up to $657.40 and silver to $12.56. Both are up on dollar weakness. Study to make sound decisions and know that success is totally up to the Sovereign God of All >> King Jesus Christ.
Best to each, Doug
The alternative of options provides a leverage. Leverage, as many of you know, is the ability to have control over a valuable asset using only a small investment of dollars in comparison to the market value of the asset. Thus, using an option, one can purchase the opportunity to buy 100 shares of XLE at $70 until September 22, 2007, today for only $320. This would be a "Call Option." It gives the opportunity, not the requirement, for a person to purchase (exercise the option) to purchase shares.
Note that in the example, there are features of the option which impact upon its value. The first is the market price of the underlying security. In this case, today's market price of XLE. The second is the length of time that the option has left to be executed. In this case September 22, 2007. In dealing with options, one must always realize that the time value decreases as the execution date nears. So in our case, the September options on XLE will have less time value remaining as each day and week go by.
In option terminology, there is the expiration date (September 22) and the exercise price ($70 per share). Options are written in contracts for 100 shares. In our example, one would purchase our specific option (XBTIR) @ $3.20 X 100 = $320.
One does not have to exercise the option to purchase the underlying security to make a profit. Often, as the market price of the underlying security increase, the market value of the option will increase, as well. If the purchaser of the option sees this increase in value and wants to sell and take the profit without exercising the option, he can do this.
As with other securities, the option can lose value if the underlying security drops in price. Options also have the additional risk of loss of time value as the expiration date approaches. This we find that options have an additional risk that many people are not willing to take. Beware of these facts!
Also, trading in options requires special arrangements with the broker. One must have a margin account and must complete special forms for trading in options. It is not for everyone, but can be an advantage for those with risk tolerance. There is in addition to the advantage of leverage the advantage of knowing precisely the amount of dollar risk one is taking. That is, the only risk is the purchase price of the option + the commission. Options can become worthless as time expires and the price of the underlying security does not rise.
Before leaving the subject of options, there is another type of option which is traded. The preceding discussed only the Call option; that is the opportunity to buy the underlying security at an exercise price until the expiration date. Think of a Call option being the opportunity to call for a stock. Call options are purchased only when one believes the underlying security will increase in value within the time allowed. On the other hand, if one believes the stock will decrease in value, he uses another type.
This type is the Put option which conveys the opportunity to sell the underlying security at the exercise price until the expiration date. Thus, one can put (sell) the stock until the option expires. This option would not be exercised unless you owned sufficient shares to sell. However, if the stock price decreased, the option would increase in value and could be sold for a profit.
Trading in options is considered to be with greater risk than buying and selling shares of securities. So Buyer Beware!
This has been presented to introduce you to options, but also, I wanted to share with you some of my thoughts on energy and specifically the XLE. It is my belief that the middle east situation is not going to cool very soon. Were it to expand in any way, petroleum delivery from the area would be reduced. Maybe it would be reduced greatly. In this case, the price of all natural energy resources would escalate drastically. The resultant impact on XLE would be a substantial increase in market value. We could also see gasoline at the pumps exceed $4 per gallon. Not good, but a possible opportunity to profit from the situation.
I have bought and am seriously considering buying more Call Options on XLE. You might want to just add to your holdings, if any, of XLE. I prefer the Call Options for the leverage advantage. Here are some of the options under consideration by me. September $70 (XBTIR) @ $3.20; $71 (XBTIS) @ $2.65 and December $70 (XBTLR) @ $4.90; $71 (XBTLS) @ $4.40. Maybe the market price of each will go down. I have not issued the order/orders yet. I always use a Limit order for options when buying or selling.
Gold is up to $657.40 and silver to $12.56. Both are up on dollar weakness. Study to make sound decisions and know that success is totally up to the Sovereign God of All >> King Jesus Christ.
Best to each, Doug
posted by Doug @ 9:38 AM
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