SCORPION

Put and Call Options

There is a way to participate in the stock market without ever actually purchasing stock in a company. It's very similar to making predictions on which way you think the stock price of a company is going to go and then betting money on it. These are called options and it is a technique used by mainly professional investors to make money in the stock market regardless of whether it is going up or down. For every bet that is made there is a bet against it and using these two opposing bets a contract is formed between the buyer and the seller. A contract is usually considered 100 shares.

Put Options

A Put Option allows the purchaser of this contract to sell a commodity at a pre-set price agreed upon in the contract. The contract usually expires within 30 days and it doesn't have to be exercised. For example, if Bob thinks Google (GOOG) is going to plummet after their next earnings report from $400 to $300 then Bob may wish to use a Put Option and find a contract that allows him to sell Google(GOOG) at $400 anytime within the next 30 days or whatever time frame is necessary for this prediction. Bob buys 5 contracts (500 shares) paying a $20 premium per share for the contract ($10,000 total) and Google does indeed drop but only to $350. Bob could now exercise his option and sell his 5 contracts which will give him (500 shares * $400) minus (500 shares * $350) minus the $10,000 he spent on the contract. This would give him a ($200,000 - $175,000 - $10,000) $15,000 capital gain from this transaction. Let's say Google (GOOG) went up instead to $450. Bob is not required to exercise his transaction because it would result in a loss and the $10,000 he spent on the contract is non-refundable.

Call Options

Call Options work the opposite way of Put Options. Taking the same scenario above let's say that Bob thinks google will go up to $500 after the earnings report is released from $400. Bob uses a Call Option and buys 5 contracts (500 shares) of Google paying a premium of $20 per share ($10,000). The earnings report is released and Google increases to $550. Bob has the right to purchase 500 shares of Google at $400 from the writer of the contract and can now resell them at $550 if he exercises his option. So Bob gets ($550 * 500) - ($400 * 500) - ($10,000 premium) $65,000 from exercising his option. If Google were to drop instead of increase then Bob has the right not to exercise his option and he would then forfeit his $10,000 on the expiration date of the contract.

Trading on Margin

Trading on margin is an excellent way to amplify your gains when you make the right picks but it is also an excellent way to amplify the losses as well. Most brokerage firms allow you to buy on margin of up to 50%. That means you could purchase $20,000 of a stock only using $10,000 of your own money and borrowing the other $10,000. It's a really good way to capitalize on short term investments but has never been recommended for long-term holdings because the $10,000 you borrowed usually comes with an APR of around 10% that you pay each month from your account. Also, incase of a sudden market crash, most brokerage services require you to keep at least 30% and sometimes even 50% Current Market Value in your account.

Therefore, if you purchase stock for $20,000 using $10,000 of your own and $10,000 borrowed than you must maintain 30% of the $20,000 at all times which is $6,000 of your own money in the account. Keep in mind that the money you borrow will never change so if that $20,000 in stock lost 20% of it's value then you would have ($20,000 * .8) $16,000 in stock left; $6,000 which is of your own money and $10,000 which is still the lenders money. If the stock fell anymore than that they are allowed to sell your shares unless you add more cash to the account.

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