Tags: Options | trader | Keene | basics

Veteran Options Trader Andrew Keene Explains the Basics

Wednesday, 07 Aug 2013 10:01 AM

By Dan Weil and David Nelson

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Andrew Keene, a long-time options trader, went over the basic uses of options in an exclusive interview with Newsmax TV.

He has an options advisory web site – KeeneOnTheMarket.com – and is author of "Keene on the Market: Trade to Win Using Unusual Options Activity, Volatility, and Earnings."

There are two kinds of options – puts and calls, Keene explains. "A call option gives the owner the right, but not the obligation to buy a certain stock by a certain expiration [date] at a certain strike price," he said.

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So if you bought Apple $400 calls, you would have the right to buy Apple for $400 between now and whenever the expiration date is.

Editor’s Note: Weird Trick Adds $1,000 to Your Social Security Checks

If Apple falls below $400, your option has no value at expiration. "But the most you can lose is the premium you paid," Keene notes. "So if you buy the $400 calls and Apple goes to zero, you're going to be out a lot less money than if you bought the stock."

Thus, options can limit your risk, Keene says.

The other kind of option is a put, which gives you the right but not the obligation to sell a stock at a certain price.

You can use puts to protect yourself against losses in stocks that you own. If the stock falls, the put option will gain in value.

"Basically the players in the game are the hedge funds and mutual funds, the institutional banks, and they are doing it for one of two reasons," Keene said.

One is to "hedge against a position," he said. "If I'm long a stock, maybe I buy puts as insurance, kind of like if I wanted tornado insurance in Florida. So I could buy it as protection."

Second, "I could buy on speculation," Keene said. "If I thought Apple was going to go higher, I could maybe buy the $500 calls, and I can get that for a very low price. And if Apple moves in my direction, I can get a great return on my money."

You can make money selling the option or perhaps exercising it.

Education is crucial for trading options, Keene says. You have to learn not to add to losing positions, the time decay of options and market volatility, he says.

Liquidity in the options market is greater than it's ever been, Keene says. "So this is actually the best time in history for a retail trader."

Editor’s Note: Weird Trick Adds $1,000 to Your Social Security Checks

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