Some knowledge about Option Trade

LEAPS     LEAPS (or "Long-term Equity AnticiPation Securities")are call and put options with an expiration as long as thirty-ninemonths. Generally, equity LEAPS have two series at any time with aJanuary expiration. LEAPS are a powerful way to leverage your tradingdollar. They allow you to control 100 shares of a quality stock for afraction of their current trading price.

Example trade alert: "I am buying 10 contracts of the Jan '06 20LEAPS (XYZAD) calls on XYZ with the stock at $20.80. I would buy thesewith the stock between $20.35 and $21.00. My initial stop is contingenton the stock closing below $20.06. Currently these LEAPS are trading at$5.30 bid by $5.60 asked. I have placed a limit order to buy at $5.50.As the stock advances, I will raise my stop contingent on the movementof the stock."

We like LEAPS and trade them frequently. From time to time, wewill buy LEAPS and also write covered calls against the positions foradded income.

BUYING PUT OR CALL OPTIONS     An"option" is the right, but not the obligation, to buy (for a calloption) or sell (for a put option) a specific amount of a given stockat a specified price (the strike price) during a specified period oftime. For stock options, the amount is usually 100 shares.

Example trade alert: "With a bounce down off both price andtrend resistance and a bearish engulfing candle on Friday, I am buyingputs on XYZ. I am placing an order to buy the April 15 Puts (XYZPC) fora limit of $1.60. My initial exit will be contingent on the stockrising above $16.37."

STRADDLES     A trading positioninvolving puts and calls on a one-to-one basis in which the puts andcalls have the same strike price, expiration, and underlying stock. Along straddle is when both options are owned and a short straddle iswhen both options are written. Example: a long straddle might be buying1 XYZ May 60 call, and buying 1 XYZ May 60 put.

Example trade alert: "I am opening a straddle on XYZ with thestock between $20 and $20.70. I am buying the October $20 calls (XYZJD)and the October $20 puts (XYZVD). Implied volatility is in the 2ndpercentile. The bid is $4.90 and the ask is $5. Current breakevens are$15 and $25. With a 6% move in implied volatility, there is a 91%chance of the position hitting either breakeven during the life of thetrade. I have a chance to make money if the stock moves in eitherdirection and/ or if the implied volatility increases."

CREDIT SPREADS     A spread strategythat increases the account's cash balance when it is established. Abull spread with puts and a bear spread with calls are examples ofcredit spreads.

Example trade alert: "I am opening a bull put spread on the XYZ.I am selling the May 1375 puts (XYZQH) $8.10 x $9 and I am buying theMay 1350 puts (XYZQQ) $4.60 X $5.50. I am placing a limit order toenter this trade for a net credit of $3.20. Notice that the leg I amselling is below support which is currently at about 1400. There are 16days left in the trade. These options expire at the OPEN on the thirdFriday, so I can't trade them after market close on the Thursday beforethe third Friday. They are European style so they could not be put tome before expiration. They are cash settled. For each pair of thespread, I will receive $320 before commissions, and I will have a netrisk of $2,180.00."

CALENDAR SPREAD    The simultaneous purchase and sale of options on the same stock with the same strike price but different expiration dates

Example trade alert: "With the XYZ at 45, I am buying the June 45puts (XYZFH) and I am simultaneously selling the Dec $45 puts (XYZMT).If filled, this spread makes money at expiration of the stock price isanywhere between about $43 and $47.99. The options are somewhatovervalued and there is a nice volatility skew in place between the twomonths I am trying to trade. An increase in volatility should help thisvolatility based trade."

NAKED PUTS     A naked put positionis established by writing (or selling) a put option and the writer isnot short stock or long another put option.

Example trade alert: "With a bounce off support at $32.80, I amselling 5 contracts of the June $32.50 puts (XYZRZ) on XYZ for $1.15. Iwill take in $575 less commissions. My initial exit will be contingenton the stock price of XYZ going below $32.65. As long as XYZ staysabove $32.50, I will be able to keep the $575. If XYZ goes below$32.50, I may be required to buy the stock at anytime before expirationfor $32.50 a share."