1st time placing a put order

SporeMonger said: "I'm looking to place a put on XTO. This is my 1st time EVER, doing options. Can anyone walk me through placing this order? XTO looks like a good short candidate to me, but since I don't have a margin account, I want to do a put instead. Let me know if you think it might be a bad idea or not and what transaction would be good."

holzie said: "Ok, no problem but you have to tell us much more to come up with some strategies on how to skin this kittie. 1.) Who is your broker? 2.) What's your commission and how is it structured (flat fee per option, or base plus fee per option) 3.) I saw the chart obviously, but tell us why you think it is going south? 4.) What is you % gain objective? 10%, 50%, more? The higher the % the more aggressive and riskier the strategy. Let me know. Holzie."

SporeMonger said: "[QUOTE=holzie] 1.) Who is your broker? 2.) What's your commission and how is it structured (flat fee per option, or base plus fee per option) 3.) I saw the chart obviously, but tell us why you think it is going south? 4.) What is you % gain objective? 10%, 50%, more? The higher the % the more aggressive and riskier the strategy.[/QUOTE] My broker is Firstrade. Options cost $6.95 for both market and limit orders with no minimum amount required. Additionally $1.25 for each contract. I think XTO is going back down to around 46, just by the behavior of the chart, since it's been channeling. I might pick a different energy stock (maybe NOV) that has more of a down trend, but every energy stock I looked at channels in this manner since 2Q of 2005 and most are ready to start dropping down to support (IMHO). I have no idea what gain I can even achieve, but I believe that it will hit support within 3 months. If I am looking at this all wrong, please let me know."

Rickster said: "As usual, you bring up great topics and pose them well. And you were smart to ask before doing this. Because you are almost certain to take a complete loss if you do what you suggested. The reason is that the normal volatility of a stock is nearly always priced into the option, and this one is no exception. Check the price of a 3month out option and I think you will see that even if the stock goes to 46 as you proposed, you wont make enough to cover the price of the option. I didnt check all the strike prices, but the few I did check looked like losers. Always remember. When you buy and option, you are not betting that the stock will go in a certain direction, you are betting that it will go in a certain direction FASTER than the person selling you the option has anticipated. That is, the seller hasnt priced in the move you anticipate."

SporeMonger said: "[QUOTE=Rickster]As usual, you bring up great topics and pose them well. And you were smart to ask before doing this. Because you are almost certain to take a complete loss if you do what you suggested. The reason is that the normal volatility of a stock is nearly always priced into the option, and this one is no exception. Check the price of a 3month out option and I think you will see that even if the stock goes to 46 as you proposed, you wont make enough to cover the price of the option. I didnt check all the strike prices, but the few I did check looked like losers. Always remember. When you buy and option, you are not betting that the stock will go in a certain direction, you are betting that it will go in a certain direction FASTER than the person selling you the option has anticipated. That is, the seller hasnt priced in the move you anticipate.[/QUOTE] Thanks Rick. You saved me from making a serious mistake. I will stay away from options until I actually learn about them."

dumaman said: "[QUOTE=Rickster]As usual, you bring up great topics and pose them well. And you were smart to ask before doing this. Because you are almost certain to take a complete loss if you do what you suggested. The reason is that the normal volatility of a stock is nearly always priced into the option, and this one is no exception. Check the price of a 3month out option and I think you will see that even if the stock goes to 46 as you proposed, you wont make enough to cover the price of the option. I didnt check all the strike prices, but the few I did check looked like losers. Always remember. When you buy and option, you are not betting that the stock will go in a certain direction, you are betting that it will go in a certain direction FASTER than the person selling you the option has anticipated. That is, the seller hasnt priced in the move you anticipate.[/QUOTE] jus passing by, and am confused as too what you mean? What if xto falls like a ton of bricks.. surely the price of the option will shoot up just as fast..?"

Rickster said: "No problem buddy. Here is a rule of thumb that has kept me out of a lot of trouble. [B] The realistic potential profit from the option needs to be at least 3 times the cost. 3 to 1 is the minimum I will accept. I like to see 10 to 1. [/B] In this case, you would need to be able to buy a May 50 put for about $1. I limit myself to that high a multiple because options are a low probability bet. These days, the option field is so crowded that it is almost impossible to find one underpriced that far. It is like trying to beat 1000 people to the last easter egg in the front yard."

dumaman said: "[QUOTE=Rickster]No problem buddy. Here is a rule of thumb that has kept me out of a lot of trouble. [B] The realistic potential profit from the option needs to be at least 3 times the cost. 3 to 1 is the minimum I will accept. I like to see 10 to 1. [/B] In this case, you would need to be able to buy a May 50 put for about $1. I limit myself to that high a multiple because options are a low probability bet. These days, the option field is so crowded that it is almost impossible to find one underpriced that far. It is like trying to beat 1000 people to the last easter egg in the front yard.[/QUOTE] yeah not too many value plays like that in options.. how bout just trading the intraday lows and highs of the priumiums? does that work well? ive been experminting with the qqq's .. its like playing craps"

holzie said: "[QUOTE=Rickster]No problem buddy. Here is a rule of thumb that has kept me out of a lot of trouble. [B] The realistic potential profit from the option needs to be at least 3 times the cost. 3 to 1 is the minimum I will accept. I like to see 10 to 1. [/B] In this case, you would need to be able to buy a May 50 put for about $1. I limit myself to that high a multiple because options are a low probability bet. These days, the option field is so crowded that it is almost impossible to find one underpriced that far. It is like trying to beat 1000 people to the last easter egg in the front yard.[/QUOTE] Yeah exactly, the way you wanted to play XTO anyways would have to be something like 5:1. Basically when you buy a straight put or call, you have to buy it with being almost certain that your entire investment will be gone, thus you need a very high risk/reward in order to do that. Options are very rarely "underpriced", there is really no such thing because the pricing models are very accurate and market makers will exploit virtually anything within within minutes or less time than that. Options are not crowded, it would be almost like pointing out the increased market volume compared to 1995. At least I don't feel crowded. However, you said it yourself, you need to learn about options first. I would forget wasting any money on books, as not a single book has everything in it. What you need is a practical guide through options. I would start on the CBOE website and watch some of their intro seminars or webinars. Lastly, options and XTO. This is an energy stock and the rule of thumb, for me anyways, is to stay away from crazy sectors like energy and biotech. Holz."

Rickster said: "Dumaman, If it plummets, he would do OK. My understanding was that he was betting it would return to the bottom of its trading range over the next 3 months. Trading the QQQQ swings used to be one of my favorite option plays. But I checked it out a few months back and decided the risk outweighed the reward. The options sellers have the upper hand right now."

Rickster said: "[QUOTE=holzie] Options are not crowded, it would be almost like pointing out the increased market volume compared to 1995. At least I don't feel crowded. Holz.[/QUOTE] By crowded, I mean that there is so much option activity that underpriced options get snapped up. It is like a fishing lake filled with boats. Years ago I did very well buying puts and calls. In all cases that hit, there was very little open interest. It wasn't uncommon for me to have the majority of the open options. These days, the open interest on those same stocks is a hundred times higher."