trading options on bank stocks
TRANSCRIPT
Trading Options on Bank Stocks
By www.Options-Trading-Education.com
www.Options-Trading-Education.com
Trading options on bank stocks may be more volatile than usual now that JPMorgan has admitted to $2 Billion in losses on credit default swaps.
www.Options-Trading-Education.com
These are the same kind of vehicles that caused such substantial losses during the stock market crash of 2008.
www.Options-Trading-Education.com
The admission by JPMorgan in an after-hours conference call brings to mind the ongoing need for regulation in the securities industry.
www.Options-Trading-Education.com
For those trading options on bank stocks it brings to mind the need to keep close tabs on the actions of and credit worthiness of banks.
www.Options-Trading-Education.com
Up until the news about JPMorgan concerns about trading options on bank stocks centered on questions about Euro Zone Austerity or growth.
www.Options-Trading-Education.com
Now options traders need to be concerned about whether back room hedge fund tactics are going to sink an otherwise profitable bank.
www.Options-Trading-Education.com
The other question is whether or not other banks are also hip deep in the same tactics and at risk for the same level of losses, or worse.
www.Options-Trading-Education.com
The good thing about trading options on bank stocks is that by purchasing options on these stocks the trader limits his risk.
www.Options-Trading-Education.com
Buy a call on JPMorgan and you stand the chance of making money if the stock goes up in price.
www.Options-Trading-Education.com
When buying a call you purchase the right to buy the stock in question at the contract or strike price and can then sell it at a new and higher price when the stock goes up.
www.Options-Trading-Education.com
You can also simply sell the call option which is not worth more. If you buy a call option on JPMorgan and it turns out that the losses on credit default swaps are worse than anticipated you will not make money.
www.Options-Trading-Education.com
However, you will never lose any more than the price of the options contract. More likely you will sell you the call contract at a loss prior to expiration and further limit your losses.
www.Options-Trading-Education.com
If you expect JPMorgan stock to fall further you can purchase a put on the stock.
This gives you the right to sell the stock at the contract or strike price even if the price falls dramatically lower.
www.Options-Trading-Education.com
As with calls you can simply sell the contract which is now worth more money.
And, if it turns out that JPMorgan pulls a bunny out of the proverbial hat and limits its losses on credit default swaps?
www.Options-Trading-Education.com
Well, then you will not make any money on a fall in stock price but you will limit your losses to the price of the options contract or sell the contract and limit your losses even more.
www.Options-Trading-Education.com
A useful way to profit if the stock goes up or down is called a long straddle. In this case you purchase both a call and a put.
www.Options-Trading-Education.com
Leveraging Investment Capital with Options
www.Options-Trading-Education.com
In trading options on bank stocks in a situation like JPMorgan’s the options trader enjoys a degree of leverage on his capital.
www.Options-Trading-Education.com
If he buys calls and/or puts his investment is the cost of the options contract.
Commonly in stock options trading the trader simply sells his contract for a profit.
www.Options-Trading-Education.com
The profit will be the difference between strike and spot price of the stock while the investment will be an options contract and not purchase of the stock.
www.Options-Trading-Education.com
As usual we are not suggesting trading options on bank stocks like JPMorgan or others.
We offer this discussion as an example of thinking through an options trade.