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CHAPTER 4

position. For example, Mark Client writes (sells) a call option for 200 shares of XYZ stock. The strike price on the option is 65. The premium paid for the option is $400. XYZ is currently trading around $72 per share. Therefore, the new owner of the option has the opportunity to buy XYZ stock for $65 per share, rather than at around $72 per share on the open market. The option is exercised, and now Mr. Client has to sell the option owner the 200 shares of XYZ for $65 per share. How- ever, Mr. Black sold a naked call and doesn’t own the 200 shares of XYZ. He then must buy the shares on the open market for the market price and then sell them for $65 per share. Let’s say he pays $71.50 per share for the stock. He, therefore, has a net loss of $900.

Premium paid to Mr. Black for option

$400

Purchase of stock paid to Mr. Black (200 shares @ $65 per share) $13,000 Purchase price of stock Mr. Black paid at market

(200 shares at $71.50 per share) Net gain (loss)

$14,300 ($900)

$14,300 13,000 $400 = $900

Options can be highly profitable for those who choose to invest in them. However, they carry a high amount of risk, as well. Investors may lose the entire amount committed to options in a relatively short period of time. For those whose risk tolerance can handle options, they are a good investment. Be sure, though, that if you decide to try some option trading you can handle the risk.You can obtain a current option disclosure document from your broker or from the Options Industry Council. You can call 1-800-OPTIONS or visit the Options Industry Council’s website: www.888options.com.

FINDING INFORMATION ABOUT STOCKS

While there are many different resources out there to help you find information about common stocks, we only touch on a few here. The first place to look for information is the financial pages of your newspaper. These pages will carry a list of stocks, alphabetically, of all publicly traded stocks. On any given day, here is how the infor- mation for XYZ Corporation might appear:

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