Wednesday, December 23, 2009

Options as future Price Indicators

Call Options are the Right to buy or the Obligation to Sell a stock at a particular price.  The right to buy is established if you buy a "call"  If you sell a "call" you have to deliver the stock to the person who bought the "call" from you.  But wait, using the indicated price of a call option for a particular month in the future can give you a good indication if  the market (the investing public) expect the price to go up by the settlement date (the date your right or obligation  expires or must be exercised).  Recently General Electric calls with a strike price of $10.00 for April have had virtually no time value.  If the stock is at $15.50 then the option has been trading for $5.50.  On the other had IBM March 125 Calls have been trading for $8.25 with the stock trading at $129.00.  This is telling me that the market expects the price of  General Electric (ge) to go no where from now until April, but it expects IBM to trade significantly higher in the next several months.  Combine this with some expected revenue forecasts for the next few months for these stocks and the winner will become very clear.

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