There are many many strategies, with options and many other instruments, but specifically speaking of the trade I mentioned, a basic explanation follows: First, what is a Put Option. Think of it as a car insurance. When you buy a car for $20,000.00 let's say you buy insurance for it for $1,000.00, so you end up spending $21,000.00 for the insured car, but in the event that you wreck it you go to the insurer and PUT the wrecked car to them, and you get the $20,000.00 you insured it for. So you end up with $19,000.00 ($20,000.00 for the car less $1,000.00 for insurance), but you have the OPTION of doing this, maybe, for some bizarre reason, when you wreck the car, you may not want to give it back to the insurer, so you end up losing $21,000.00. Now, speaking of stocks, you can buy 100 shares of XYZ for $100.00 a share, for a total of $10,000.00. Now you buy insurance for it, for let's say $1,000.00, so in the case XYZ goes down in value, you are insured for the $10,000.00 you paid for it. For example, if XYZ goes down to $50.00 a share, you have the OPTION of exercising your insurance (PUT OPTION) to get $100.00 for each share, and whoever sold you the insurance (PUT OPTION seller), has the obligation to pay you those $10,000.00. So in this case, you end up with $9,000.00 (the $10,000.00 you bought the stock for, less $1,000.00 to insure it). Instead of ending up with $5,000.00 have you not insured it. So, if you think it is worth buying stock for a certain company at a certain price you believe is a great price, now you reverse the roles discussed above. Now you are the insurer, and you sell the insurance to the stock owner. So you get a premium for this insurance, and if the price of that stock ever gets to your target price, you are obligated to buy it for the price you specified in the insurance contract. For example, let's say you are interested in buying 100 shares of XYZ at $100.00, but right now it is quoting at $120.00. You sell a PUT OPTION (an insurance policy) for $1,000.00, where you acquire the obligation to buy that stock for $100.00 a share (which you were already thinking of doing, anyway). So if the prices of XYZ goes down, say to $80.00, you HAVE to buy it for $100.00, for a total of $9,000.00 ($10,000.00 for 100 shares of XYZ@$100.00 a piece, less the $1,000.00 you got for the insurance policy). So you end up buying your stock for a net of $90.00 a share. And if the price never gets below $100.00 before the PUT OPTION expires, you get to keep the premium you collected (the $1,000.00). So the worst case in this scenario is that you get to buy the stock for what you were willing to pay for it (or even less). And the best case is that you get to keep the $1,000.00 when the insurance expires. I hope this clears a bit what I was referring to. Gabriel -------------------------------------------------- From: "Marcel Birthelmer" Sent: Tuesday, September 30, 2008 10:04 PM To: "Microcontroller discussion list - Public." Subject: Re: [OT] House Rejects Bailout, Stocks Tumble: Dow Down 7%, Nasdaq 9% > So... who wants to explain what all that means? > - Marcel > > On Tue, Sep 30, 2008 at 8:52 PM, Nate Duehr wrote: > >> TGO Electronica wrote: >> > Buying stock just like that is one of the poorest options there are for >> > investing, specially if the buy is backed by a "hunch". >> > One better way to do it would be to sell a Put option at the strike >> > price >> > you'd like to buy the stock at, and if it ever gets that low, you get >> > the >> > stock for a slightly better price (because of the credit you received >> when >> > you sold the Put option), and if it never gets to that price before the >> > option expires, you get to keep the the whole premium you collected >> > when >> you >> > sold the Put option. >> > >> > There are many better alternatives to just "buy stock". >> > >> > Gabriel >> >> Amen to that. NEVER EVER USE A MARKET ORDER to buy a stock. >> >> Limit orders are far saner... if you're dealing directly in the stock. >> >> Your put technique is a little more advanced, and has some other risks >> associated with it, but it's not out of the grasp of any engineer or >> tech on this list to learn how it works. >> >> Nate >> -- >> http://www.piclist.com PIC/SX FAQ & list archive >> View/change your membership options at >> http://mailman.mit.edu/mailman/listinfo/piclist >> > -- > http://www.piclist.com PIC/SX FAQ & list archive > View/change your membership options at > http://mailman.mit.edu/mailman/listinfo/piclist > > > No virus found in this incoming message. > Checked by AVG - http://www.avg.com > Version: 8.0.173 / Virus Database: 270.7.5/1702 - Release Date: 10/1/2008 > 9:05 AM > -- http://www.piclist.com PIC/SX FAQ & list archive View/change your membership options at http://mailman.mit.edu/mailman/listinfo/piclist