An Even Trading Field?

August 4, 2009

The Securities and Exchange Commission, better known as the SEC, is considering a ban against so-called “flash orders.” Apparently, buy and sell information can occur in the tiny little milliseconds leading up to when information is made public. During these milliseconds, uber-computers used by certain trading platforms like Direct Edge, Nasdaq OMX and BATS can use the buy and sell information to make better trading decisions.

How does this affect you? Well, it may or may not affect you that much really. If you’re playing the markets for the long term, then it probably doesn’t matter too much. But if you’re playing for short-term gains, like options plays, then milliseconds can make a huge difference.

But isn’t it nice to know how people are trying to scam other people? And that sometimes our publicly funded regulatory bodies do, in fact, pay attention?

-RT


Understanding Options For Newbs Part Ia: What is an option?

May 4, 2009

In the last post I discussed what an option is most in terms of money. But you should also know where these options are coming from, because when you buy an option someone else must be selling that option to you. When you hear about CEOs getting millions of dineros in stock options, these are exactly what they sound like. One of those millions of options might just be the one you’re buying!

Basically, when someone owns 100 shares of a stock and wants to sell them, he/she “writes” the option. You can think of it as writing up the contract to purchase shares. That might well be where the terms “options contract” and “writing an option” came from, because no one ever says I want to buy a stock contract. That’s just silly. =P This is the most common way option contracts are created, by having someone who owns hundreds of shares sell off the options to them. We call this a covered call or covered put, depending on the type of option being written.

There exists, also, UNcovered calls/puts. In these cases, people borrow shares from their brokerages to write options. I hope you became wary upon reading the word “borrow” because this is a very dicey game to play. To write an uncovered option you really are borrowing money that you don’t have in your account in the hopes that you turn a profit off these options and can then repay your brokerage. If you don’t turn a profit you still have to pay back the brokerage. And if you bought 100 shares to write an option contract for Under Armour, the example we used last time, then you’ll have borrowed about $2,000 worth of UA shares. That would not be fun to pay back if you didn’t have the money to cover your bets options in the first place!

This just about covers what an option is, in the most technical sense. Please comment and let me know if you have any questions!

Also, a quick note: employee stock options are always call options. It makes sense if you think about it, how could they give you put options? That would mean they give you the right to sell options that aren’t yours… now that doesn’t make much sense, does it?

– RT