On page 202, Chapter Eighteen, “What Should I Do Now: Funny Money, Serious Money, and Investment Money“, Mr. Bogle talks about “…trying out modern remedies for age-old problems lets you exercise your animal spirits. If you crave excitement, I would encourage you to do exactly that. Life is short. If you want to enjoy the fun, enjoy! But not with one penny more than 5 percent of your investment assets.
So my “Funny Money” or drug of choice if you will, are Options. Stock Options. Options can be dangerous. I do not recommend them to the faint of heart. You can lose a lot of money quickly with no come back in sight.
Options are a depreciating asset over time. I’ll reserve the many definitions for another time or times. Unlike a stock where you can hold a stock forever (most of the time) to see if it recovers from losses, options have a defined length of time to make you money or make you lose money.
I will reserve for another post how I lost a bunch ($$,$$$.$$) in Options when I first started trading them. Ouch!! It pains me to remember it all.
But now, I’ve gotten a bit wiser and more patient when it comes to trading Options. For this example I’ll talk about a recent options trade I made in the last two weeks.
On Tuesday, July 10, 2007, I purchased the AU August 45 Calls (AUHI) for .85 cents. I purchased 10 contracts which allows you to control 1,000 shares of AU stock. I know that sounds confusing but like I said, I’ll write about the definitions of Options in another post.
One contract allows you to control 100 shares of AU which means you take 100 shares x .85 cents and you get $85.00 for one contract of AUHI, the AU August 2007 45 Calls. Thus, 10 contracts = 1,000 shares x .85 cents = $850.00. Got that? 
The month of August tells us that this “deal” is no longer valid after the third Friday of August when it expires. Why the third Friday of August? Because, Options expiration always lands on the third Friday of every month.
So with this trade, I was believing that between Tuesday, July 10, 2007 and Friday, August 17, 2007, the AU August 45 Calls (AUHI) for .85 cents would appreciate enough to make me some moola. Well, they did appreciate because the stock rose in value which makes Call Options rise in value, typically.
Why and how did I know to do this trade? Well, I listen to Jon and Pete Najarian for FREE (everyone can) at The Chicago Board Options Exchange where you can watch them (usually Jon) at least twice a day. They give up some valuable information for Options traders.
This particular Option play showed Jon and Pete that there was huge trading on the AU August 45 Calls (AUHI) and they kindly relayed it to their listening public. You can see this at many stock chart sites that display options and I use Big Charts where you can search on the symbol AU and then select the “options chain” link that would show you the AU August 45 Calls (AUHI) were trading in huge volumes compared to other AU Options. See the screen shot below.
See the 11,361.00 in “Open Interest”, another term we’ll talk about later. That is huge, abnormal volume compared to the other levels for the stock AU and that means it was most likely big time institutional investors taking advantage of this Options play. Somebody knew something was going to happen or folks were just plain bullish on this stock.
The stock symbol AU stands for AngloGold Ashanti Limited, and they are an exploration and mining company. Today, 7/19/07 I sold my 10 contracts for $1.50 each. So back to our bit of math from above. 10 contracts = 1,000 shares x 1.50 = $1,500.00. That’s what they sold for minus commissions of approx. $40.00 or approx $20.00 on each side of the trade, $20.00 to open the trade and $20.00 to close the trade.
So I made $1,500.00 minus $850.00 = $650.00 minus $40.00 approximately for fees. So a nice $610.00 profit in 8 trading days. Who knows, I could have waited for more gains because they don’t expire until the third Friday in August, 2007. But there is a saying that you must memorize when trading Options, “pigs get fat, and hogs get slaughtered!!” This means, you have to know when to get out and be happy with what you’ve made.
So the final question is, what percentage did I make on my money? $610.00 / $850.00 x 100 = 72% return on my money. Holy Kamolie!! Cha-Ching!! Wouldn’t that be great to do every day? Yea, right!!
Again, there’s my funny money and “excitement”. But, it could have gone the other way too. Which would have been bad and I would have been forced with some heavy decisions before the third Friday in August 2007.
Hopefully this wasn’t too much to digest and like I said previously, I’ll define some Options terms in another post or two. Have a great weekend!!
