I play options. Not too much, but I keep my eye on them and jump in sometimes. I describe it as “play” because it’s much like gambling, only I’m still trying to convince myself that it’s not gambling because there’s some great resources out there that keep convincing me otherwise. As long as I keep making more money than I lose, then I’ll keep playing. Anyway, this is an exciting one and it doesn’t happen like this all the time.
On Thursday, 6/7/2007, someone from a very popular options service freely discussed the July $12.50 Calls for MNKD, Mankind Corp, a biopharmaceutical company. Apparently, a lot of folks are interested in the stock and options of Mankind. So I decided to buy some of the recommended July $12.50 Calls and got in at .75 cents. Pretty cheap.
Folks, on Friday, the MNKD July $12.50 Calls that were .75 cents the day before closed at $1.40. DANG!! So let’s do the math and give an example of the trade. You give me .75 cents on Thursday and on Friday I turn around and give you $1.40 back. In other words, you made a whopping 87% on your money. SNAP!!
However, in the Options game you always have to remember pigs get fat and hogs get slaughtered. Which translates into take your profits, close the deal and move on. In order to win the options game, you can’t get greedy. I don’t know if there’s any life left in the MNKD July $12.50 Calls, but we’ll see on Monday, 6/11/2007. So let’s put some real money to the equation.
In Options, one contract is like controlling 100 shares of stock. So if you purchased one Call contract it would cost you $75.00 (.75 cents per share times 100 = 75). Then the next day you sell the one Call contract for $140.00 ($1.40 times 100 = $140.00). You’re profit is $140.00 minus $75.00 = $65.00. For our example, I did not tell you about the brokerage fees and of course don’t forget taxes you’ll have to pay next year on this profit. GEEZ!!
You can see how things get involved with Options and that’s just Calls. There are things called Puts too and then there are tons of strategies you can do with Calls and Puts. YIKES!!
Ok, now for the finale - Let’s play with the real, real money - Let’s say you bought 100 contracts for $7,500.00. See if you can do the math. On Friday, you closed (sold) your position for $14,000.00 for a real, real profit of $6,500.00. Jeepers Wally!!
That’s your take home pay. Enough to fund your Roth IRA for the year and donate the leftovers to one of the disease organizations of your choice that Mankind creates therapeutic products for.
Ok, but again don’t forget the brokerage fees which are larger because you were playing with more contracts, upwards of $200.00 to $300.00, and the taxes you’ll have to pay next year. Well, there’s even more to discuss about taxes when you’re buying and selling options, but that’s it for this post. WHEW!!
There are many places on the web to learn about options. I don’t recommend playing them unless you have extra, extra cash, have taken a course or two, know what you’re doing, use a professional options service, and have paper traded for at least one year. Just a note, most likely your mutual fund manager or mutual fund management team uses options. If you read your fund’s prospectus or annual report and see anything about derivatives, options, call or put contracts, then they are at least telling you they might use or be using options strategies to enhance or protect the funds holdings.
