Easy “A” on Options
- Zach Scheidt on adding options to your investing arsenal
- Exhibit A: one goofball’s options trading gaffe
- Breaking down how stock options really work
- Feds want bullet train bucks back from Cali
- Two biotechs overcoming Alzheimer’s confirmation bias
- Making lemonade out of lemons in Denmark (so to speak).
“I strongly urge you to consider adding stock options to your investment strategy,” says wealth and income specialist Zach Scheidt.
Sound advice… but only if you actually understand how stock options work.
“To be fair, options do sound complicated, involving words like ‘contracts,’ ‘strikes’ and ‘expiration,’” Zach says. “And if used incorrectly, they can quickly lead to big losses.”
Exhibit A: We give you Drew Millard, contributing editor at the website The Outline…
“I first started using Robinhood a few months ago,” Millard says, “just as the stock market was constantly building upon itself.” (An inelegant turn of phrase but… whatevs.)
For Millard, the Robinhood app appealed to him for two reasons: First, “it’s a nice-looking thing that lives on your phone.” So a sleek, user-friendly app that’s convenient. Check.
Second, Millard says: “Traditional brokerage firms such as TD Ameritrade or E-Trade charge a fee every time you buy or sell a stock; Robinhood doesn’t.” So no fees — also check.
“The [Robinhood] app made investing seem not so different from a phone game,” he says.
Danger, Will Robinson, er, Drew Millard!
“Notably, Robinhood lets you trade ‘options’ with scarily little oversight,” Millard continues.
After the briefest of tutorials — “despite not quite understanding what options trading actually is” — Mr. Millard was approved. His phone’s screen lit up with the following message, confetti and all…
Needless to say, our hapless Mr. Millard was out of his element and lost his lunch (we mean that literally — the guy’s a millennial) on the cheapest “call” option he could find, Under Armour for $19.
“The fact that I only fully understood how this dangerous short-term financial product worked after I’d actually bought the thing probably means [it’s] a terrible idea for Robinhood to offer this as a service,” Millard concludes.
Sure, blame it on “dangerous” options and Robinhood… sheesh.
“On the other hand, few instruments on Wall Street offer as much profit potential in such a short amount of time, Zach says.
“But it will only make sense if you understand how options work in the first place.”
And Robinhood’s tutorial ain’t gonna cut it…
First: “Stock options trade alongside stocks on the major exchanges,” Zach says. “But while stock shares represent part ownership in a company, options represent rights and obligations.
- “Buying an option gives the buyer specific rights to 100 shares of a given stock.”
Second: “A call option gives the buyer the right to buy that given stock for a set price, called the strike price,” says Zach. “Those rights expire on a set date.”
- If the holder of the option doesn’t choose to buy before the expiration date, “the rights disappear and the option becomes worthless”
- Or the holder of the option “can choose to close the position at any time by selling the option,” Zach says, “either for a profit or a loss.”
Exhibit B: “Somewhere out there,” Zach says, “a trader is thinking that Apple shares could be worth $190 or more by the end of the year.”
At the time of writing, Apple shares are trading for $172.14, by the way.
“But with the market’s volatility, he’s not willing to stake a large amount of cash on his analysis.” So the trader turns to the options market instead.
“He can buy a call option on Apple with a $175 strike price that expires in January 2020.
“If he buys it now, he’ll pay just $15 a share for the contract.
“Since each option represents 100 shares of stock,” Zach says, “it means shelling out $1,500 — far less than the $19,000 he’d have to pay if he bought the shares outright.
“With the option, he has the right to buy 100 shares of Apple stock for $175 — no matter what they’re currently selling for.
“If he’s right and Apple goes to $190, he can exercise his rights… buying $19,000 worth of stock for $17,500… essentially making $1,500 in the process.”
If the trader’s analysis winds up being wrong — Apple never gets above $175 by January 2020 — his option expires worthless.
Now imagine being on the other side of this trade…
“Let’s say you’re holding 1,000 shares of Apple (AAPL) right now that you paid around $118 a share for,” Zach says.
“So you could sell call options against your Apple stock,” Zach says. “You essentially create a contract saying that you’re willing to sell 100 shares of Apple at the option’s strike price anytime before the option expires.
“In this example, the strike price is $175 and the option expires in January 2020. The option buyer pays you $1,500 to keep your promise.
“That’s instant cash for your portfolio,” says Zach, “and there are a few ways it could play out.”
First: “If Apple ever tops $175 a share, the person who bought your promise — the call option — could ask you to fulfill its terms.
- “You’ll… sell him 100 shares of Apple for $175 each,” Zach says, “no matter what the current price is.”
That’s not so bad… really!
- Think of it this way: “If you bought Apple for $118 a share, selling them for $175 nets you a nearly 50% gain.”
Second: “It gets even better if Apple shares never trade above $175,” says Zach. “Sure, you don’t see a lot of capital gains on your stock. But you still collect every dividend Apple pays out.”
Third: “And if the option expires worthless, you get to keep the $1,500 you received for selling the option.
“So selling calls against your stock shares is a great way to earn income in up-and-down markets,” Zach says.
“During upturns, you can sell shares for a nice profit,” he continues, “and you can keep cash rolling in when the stock market heads south.
“Best of all, volatility tends to push up option prices — meaning you’ll collect bigger payouts by selling them!”
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To the markets: The Dow’s up nearly 180 points, to just over 26,000…
And there’s more green… the S&P 500’s up 16 points, to 2,791, while the Nasdaq’s up almost 60 points, to 7,518.5.
As for commodities, a barrel of WTI is selling for $57.29, up 33 cents so far today; gold’s gained $5.80, to $1,333.60 per ounce.
Checking on crypto — bitcoin’s up $23.71, to $3,927; bitcoin just can’t crack that $4,000 resistance level. Yet.
Update: more Golden State bullet train bedlam…
Last week, we reported California’s Gov. Gavin Newsom was finally throwing in the towel on Jerry Brown’s pipe dream — a bullet train connecting San Francisco to Los Angeles.
However, in order to keep federal money — totalling $3.5 billion — Newsom had opted to complete a seriously truncated train connecting Bakersfield with the Central Valley.
But now the project might be scrapped entirely: “The feds (and a gloating President Donald Trump) are swooping in to try to get their money back,” Reason says.
In a letter sent Wednesday, the Federal Railroad Administration (FRA) informed the state it would be cancelling “$900 million in federal funds set aside to assist in the construction of the Central Valley portion of the route.” Unless the state of California can make a case that the shortened train conforms to original bullet train plans.
“[The letter] also warns that the FRA may terminate the cooperation agreement entirely and attempt to claw back the money it has already sent.”
Gov. Newsom’s going to the mattresses and referencing the state’s opposition to Trump’s wall: “It’s no coincidence that the administration’s threat comes 24 hours after California led 16 states in challenging the president’s farcical ‘national emergency.’”
“This is California’s money,” Newsom says, “and we are going to fight for it.”
We’ll keep you updated…
“Another one bit the dust!” says our breakthrough technology expert Ray Blanco. “It’s an all-too-common story for biotechs trying to cure Alzheimer’s disease.”
Prevailing wisdom says that Alzheimer’s disease is caused by beta amyloid protein plaques that damage healthy brain tissue; that’s led researchers at Roche/Genentech to create the drug crenezumab… that unfortunately failed in third-stage clinical trials.
“Biotechs and Big Pharmas alike have failed again and again,” Ray says. “It could be that we fundamentally don’t understand this disease yet.
“Clear out the plaques and you stop the progression of Alzheimer’s, the theory goes,” he continues. “But crenezumab’s failure is more evidence that this theory isn’t holding up very well against cold reality.
“In the meantime,” Ray says, “several… biotechs are working on alternatives.”
Alternative treatments… and alternative theories.
One such biotech, Ray says, believes amyloid proteins aren’t the problem; rather, it’s “misfolded proteins” that “‘infect’ normal forms of beta amyloid, turning them into toxic versions.”
The biotech’s currently working on “engineered antibodies that target these misfolded variants.”
And targeted therapy “should allow for higher dosing and greater clearance of toxic species of this protein,” says Ray.
“Another neuroscience biotech… is taking a completely different approach to Alzheimer’s.
“Instead of going after protein plaques,” Ray says, “[the company] has developed a platform designed to alter the inflammation-signaling cascade in stressed brain cells.” All of this, aimed at reducing brain cell death, or apoptosis.
“If history is any guide, Alzheimer’s drug development is an incredibly risky proposition,” Ray says. “With the risk, however, comes a shot at incredible rewards.”
An effective Alzheimer’s drug that does more than just mask symptoms but actually delays the disease’s progression (or even provides a cure!) “would almost instantly become one of the best-selling drugs of all time.
“If it’s one of [these] ‘moonshot’ Alzheimer’s biotechs, we could end up seeing gains that will be in the record books from current prices.”
Ray’s got the inside scoop on an extraordinary neurotech breakthrough: Shares of this tiny West Coast startup might skyrocket.
And company insiders have already gobbled up 11,843,747 shares of the company’s stock… in a single day.
Whatever they know, the message is clear. Something’s happening — and this one looks like it’s about to make a lot of people very rich.
Hmm… what’s to be done about a mountain-size heap of garbage within city limits?
If you’re in Copenhagen, the answer’s obvious: Ski down it.
(Are you as shocked as we are? Not about the skiing — we’ll get to that in a second. No, we’re shocked — nay, scandalized — that they even have garbage in a Scandi paradise like Denmark… heh.)
“The waste is actually inside Copenhill, a waste-treatment plant 10 minutes from downtown Copenhagen,” Reuters says. “Its main facility is a futuristic building with a sloping roof 85 meters high that’s covered in a material called neveplast. It looks just like a ski slope, except it’s green.”
And for those not down with the metric system, that’s about 279 feet high…
The plant started operating in 2017 and is a giant leap forward for the country as it tries to become the world’s first carbon-neutral capital.
As for the recreational slope, it opens to the public year-round come spring.
“It’s a slightly different experience than to skiing in real snow,” says ski enthusiast Tommy Christensen, who’s already tried out the slope. We’re assuming he’s a ski enthusiast and not a waste-treatment enthusiast. But… to each his own.
Now for the real question: What to name this “trashy” ski slope? Our fave? The Clutterhorn.
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We’re guaranteeing we will show you how to make a minimum of $2,000 a month using this strategy… but we can’t guarantee the page will be up for long.