Options

[qbeing1010]

After some brief discussion of LEAPs, etc. on YMB, I decided to do a little research and educate myself.  I want to post here to avoid excess flaming and maybe get some reasonable responses from y'all.  I'm not experienced with trading or options, but I am an engineer so I understand math a little bit.  I will be using the recently discussed ARWR options numbers for this post, for the most part.

Assumptions:

1. I believe strongly in Arrowhead; I believe it will be successful. Not sure HOW successful, but somewhere between VERY and OF BIBLICAL PROPORTIONS. Therefore, I want to own more shares.

2. I don't have a lot of extra money at the moment. I have some. I will have more extra money over the next 8 months.

The January 2017 options are about $0.20 each (not sure exactly how to read that cost on Yahoo Finance), for a $15 strike.  So if the PPS is over 15, I can buy those options for 15 per share.  So that would cost me 0.20 per share now, then 15 more next January, plus fees.

The January 2018 options are $2.00 each with a $10 strike.  So I can buy these options now for $2 each, and pay $10 per share in Jan 2018 if the PPS is over $10?  So total of $12 per share plus fees.  But more up front.

OR, I can just buy shares now at ~$6 and keep adding as I get more money.

Is this pretty much the long and the short of it?  Any advice or comments?

[Think2Succeed]

Yes @qbeing that's exactly how it works. I'll add two comments though:

1. If you buy the Jan 2017 calls with a strike of $15 for $0.20 each contract (a contract gives you the right to buy 100 shares) AND the PPS at expiration is under $15 then you lose your entire initial investment of $0.20/contract bought.

2. The good news is that if the share price appreciates ..let's say to around $13 in November and you think the share price won't rich $15 by Jan 2017 you can always sell your calls (contracts) at any time without having to wait for the expiration date. If ARWR would trade for $13 in November you'd probably get around $1 per contract for your initial $0.20/contract investment...a super nice 5x ROI without having to worry about the PPS getting to $15 anymore.

T2S

[qbeing1010]

Thanks, T2S! I have a couple more questions:

1. So you are telling me that in the above scenario, $0.20 will give me control of 100 shares? That's crazy. So for $2000 I can have options on 1 million shares? There must be some upper limit.

2. Can I choose to sell just some of my contracts? Can I allow a portion of my options to expire unused? For example, if I get 10 contracts (1,000 shares) with $15 strike next January, and when I get there (and share price is over $15), maybe I don't have $15,000 available. Maybe I can only purchase $7,500.

Thanks again for your help.

[Think2Succeed]

1. Yes $0.20 x 100 gives you control of 100 shares BUT you also must pay $15/share to own them....you can only convert your contracts into shares after you pay the price you agreed to initially when you bought the options...that's why you need a share price >$15.20 by expiration to make this a profitable transaction for you. There is no upper limit...$2000
gives you control of 10 000 shares (2000/$0.20 = 10 000) .meaning every $1 above $15 means $10 000 in profits for you...how cool is that, right ?. That's why I also own 90 Jan 2017 calls (different strikes) that gives me control of 9000 more shares.

2. Yes to both questions. You can sell only some of your contracts and you can convert into shares the rest...in either case you still make a nice profit (your contracts aren't left unused because you can just sell them for a much better price than the one you paid for them without the need to convert them). That's why they're called options...because you have a lot of options with them.

PS: Edited..sorry i made a mistake initially (i forgot to multiply by 100 to get the contract's price)

T2S

[grandcaddy]

There is tax consequences on this trade. You are holding this transaction under 1 year, the profits will be taxed as regular income. I am not a CPA you need to talk to one before selling and/or converting options to shares. A $.20 option costs $20.00 plus fees. Options can be sold or exercised at any time up to the expiration date.

[coldlander]

It is .20 per share that you will control.   So, $20 lets you control 100 shares (one contract).  You would need $200,000 to control a million shares.