Friday, September 22, 2006

T - NOV32.5C

Slightly ahead of coach Rob talking to me about options, I bought the AT&T Nov32.5 call option for $0.50 on Wednesday morning at the same time as I purchased the stock for $31.60. I only bought one contract for $50 and sold it this morning for $125. Most people can do that math in their head: 150% in just over 2 days.

Of course any one trade can make you money, and options can certainly get you triple-digit percentage returns. That's very exciting, however one thing that coach Rob did not have to tell me about options is that the difference between the Bid-Ask spread is a hugely significant percentage (5-10% typically), compared to the percentage of the difference between the Bid-Ask of a stock. This means that any buying and selling of options comes with a 5-10% loss built-in. With slippage like that, you really need to have a solid win-loss ratio.

Consider the option trade I described above: Sure I made 150%, however I could have easily lost 15-30% and sold the contract back for $45-$35 had the stock gone the other direction. Although the reward:risk may be justified at ~3.5:1 there's no such thing as a completely certain trade, and when you're losing 5-10% built-in, you've really got to be trading well to not get eaten alive!

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