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Chesapeake Energy Corporation Message Board

  • fast_bull_run fast_bull_run Jan 4, 2006 9:14 PM Flag

    Options Question:

    I am looking at some options. I have never bought before, so I am currently only watching from the sidelines. Hoping to get a better feel for them.

    What indicators do you use to tell if a option is a good buy? Could someone perhaps take me and the rest of the board through a basic example using a CHK call or put?

    It would be greatly appreciated!

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    • Thanks again, Nipper_dog99; every piece of info helps me understand better this new realm; so from your two posts, i would assume that you feel that after the Fri. report buying {deep}in the money calls would be best. Any you favor {Leaps included?

      NO recriminations if i follow any board suggestions on this - i promise. Again MUCH TIA

      40% of my port is CHK

    • glad to help.

      For calls, out of the money is any strike price that is higher than the current stock price (currently 33.05)

      I prefer to buy calls that are deep in the money, they is somewhat less risk in losing all of your investment. You pay a higher premium for those.

      Out of the money are more risky since you need the stock to move to that strike price to make money at expiry time. You can buy/sell anytime so you can also trade their premium like the stock and make/lose money too.

      Out of money premium increase/decrease depends on stock price and lenght of time to expiration. It could be bigger reward but risk is higher.

    • Dear Nipper_dog99,

      Thanks for your kind response.

      i'm new to options and bought 10 lots of the Apr. $40s Tuesday - am up 27% {only a couple hundred dollars} and wondering whether to sell them now.

      What does your copmment 'if you must be out of the money' mean? Is in the money less risk/greater reward? MUCH MUCH TIA

    • wait after the report. They should get cheaper.

      Look at apr 35 if you must buy out of money. A bit more pricey but if you think stock goes to 40 by Feb, you would more than double your investment.

    • anybody got any opinions on the April $40 calls? - they seem cheap. MUCH TIA

    • Good points and analysis tulsa..going to think about it, and as you said keep an eye on ng price. Having said that I do think earnings will be the biggest driver of CHK. Of course I don't think they come out before late Feb.

      Thanks Again

    • Feb 35? I think NG is dropping, and will continue to drop. The trend is heading that way. I cannot see CHK continuing up if the underlying commodity is going down. Feb expiration is only 6 weeks away, so unless CHK is part of a merger deal that will break soon, I could not bring myself to buy a call option that bets on a turnaround in the trend in that short of a time frame.

    • Very good info tulsa. What would your opinion be on 35 Feb calls??....to risky for reward? Just curious

    • Thanks for your input mdf695.

    • Walk through on option buy for CHK (call and put)...

      CHK closed today at $33.05. So let's say I think CHK is going UP. Then I will want to buy a call option, meaning I am buying the right to buy the underlying stock (CHK) at a specific price. For this example we will use a strike price of $35.00, and we will choose a time frame of 6 months. So look at the options chart for CHK, look for July 2006 under the call chart find the strike price of $35.00, and you see the asking price today is $3.70. So I will place an order through my broker for 20 contracts (or 2000 shares, make sure you get this right) at $3.70 per share. This will cost $7400 plus commission (which is not much). If in the next month, CHK's price rises to say $38.00 per share, the value of my option will rise as well, probably to somewhere around $5.50 per share. So my options are now trading for $5.50 x 2000sh = $11,000. This is a $3,600 gain, or about 50% or my original investment. So, I can sell my options at any time before they expire (July 21, 06) for the bid price, just like selling stocks.

      If I feel CHK is going to go down, then I would buy a put option. So today a CHK put at a strike price of $32.50 is going for $3.60. So I can buy 20 contracts (or 2000 shares) for $7,200. If the price of CHK falls in the next few months, then the value of the put will increase accordingly.

      In either the call or the put scenario, the price can go against you. If you buy a call and the price sinks, you will either sell the call at a loss, or let it expire and get nothing. Likewise, if you buy a put and the price rises, you will sell at a loss or let it expire worthless.

      Like I said before, I buy long term options only (expire in Jan 2008, 2 years from now.) In most cases, stocks will go through up and down cycles, meaning I have more time to wait for my option to come into the money. This is good for commodity options as they tend to have long swings up, then long swings down depending on the underlying commodity (NG from $5.00 a year ago to $14.00, now back to $10, all i 12 months.)

      I hope this helps. Good luck. Study hard before you jump. A little money goes a long way in options.

      • 3 Replies to tulsa_012000
      • Thanks for the summary. I pretty much understand these basic concepts but was hoping to apply them to a real situation. What calls/puts do you own, or you would consider purchasing? (I wont be buying on your advice, just looking for some options to follow and get a feel)

        What indicators do you see right now that support your picks?

      • I was writing my post tulsa and when finished read yours. Thank you for a very good example of option trading.

        Traveling

      • One more thing. If you are BUYING options, you downside is limited to only the amount you purchase. So if I spend $5000 on an option purchase, the most I can lose is that $5000. I can gain an unlimited amount.

        I have never written a call or a put, meaning be the originator of the call or put. I believe in that case I have an unlimited downside potential. If I sell the option to buy the underlying stock (say 1000 shares) from me to a purchaser like you, and the stock goes from $40 per share to $400 per share, I would be out the entire amount or $360 x 1000 = $360,000. If it went to $500, then I would be out $460 x 1000 = $460,000. To the writer of the option, there is no limit to downside.

        Someone correct me if I am wrong on this.



        Someone

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