Option basic

An option is a contract giving the buyer the right, but not the obligation, to buy or
sell an underlying asset at a fixed price on or before a certain date. If, over the life of the contract, the asset value decreases, the buyer can simply elect not to exercise his/her right to buy/sell the asset. There are two types of option contracts - Call options and Put options. A Call option gives the buyer the right to buy the underlying asset, while a Put option gives the buyer the right to sell the underlying asset.
There are four types of participants in options markets: Buyers of calls, Sellers of calls, and Buyers of puts and Sellers of puts. People usually use option for hedging and speculation.
Option strategy can be:
• Long (buy), where you do long call in bullish condition and long put in bearish condition.
• Short (sell), where you do shot put in bullish condition and short call in bearish condition.
Option has a lot of advantage than stock. It can control stock with small money compared to buying the stock it self. Option can also take advantage of declining stock price by using put strategy.

Before we learn about various strategy, there are various things in option we should know.
• Equity option contracts usually represent 100 shares of the underlying stock.
• Strike prices (or exercise prices) are the stated price per share for which the underlying security can be purchased (in case of call) or sold (in the case of a put).
• Equity option holders do not enjoy the rights due stockholders – e.g., voting rights, regular cash or special dividends, etc.
• The strike price and stock price determines whether that contract is in-the-money(ITM), at-the-money(ATM), or outof-the-money(OTM). If the strike price of a call option is less than the current market price of the underlying security, the call is said to IMT. If a put option has a strike price that is greater than the current market price of the underlying security, it is also said to be ITM. The converse of IMT is OTM. If the strike price equals the current market price, the option is said to be ATM.
• Option price is consisted of intrinsic value and time value. The amount by which an option is ‘in’ or ‘out’ of the money is referred to as its ‘intrinsic value’. If an option is ‘in-the-money’ it will cost more than an option which is ‘out-of-the-money’. This is because it has more intrinsic value. For example, stock “ABC” current price is $10; the call option is $5. The call option is called ITM, and it has intrinsic value ($10-$5) = $5. Another important factor is the amount of time an option has until it expires. This is important because the more time there is until expiry, the more time there is for the option to move into a profitable position. This is known as the time value of the option and it reduces significantly when reaching the expiration date.
• Volatility of the price of the underlying security also affect the option price. The more price volatility an underlying security has, the more chance that it will move in a profitable direction for the option buyer. For this reason, option writers will price high volatility into option price.
The basic strategy for option is call and put. When you believe that a stock if going to be up next year, buy call option. But if you believe the price will go down next year, buy call option. How do you know whether the stock will go down or up next year? You can read news from Bloomberg, yahoo, and reuter. From there you should be able to find out about the company, whether the stock can go up or go down. If you want to know about Merril lynch, you can check http://finance.yahoo.com/q?s=MER or http://stocks.us.reuters.com/stocks/overview.asp?symbol=mer. From yahoo, you can know it’s one year price estimate, and from router you can know the recommendation from them, whether it is hold, buy, or sell. What I do is buy put or call option, depending on their outlook. I will buy ITM option which is closest to the current price and with about one year to expire. Hold the option until it reaches your target price or there has been a change of fundamental which will bring the stock in the opposite direction from your position. You must also be careful with expiration date, because your option can worth nothing. When you buy call and put option, your loss is limited, but your gain is unlimited.
This article is meant for beginner, I will write another article for intermediate and advance player.

Global economy is entering recession

The world economy is definately going to recession. There are plenty of data to support this. The Fed rate cut shows how bad the subprime mortgage is. And with the slowdown is US market, the global economy will be affected too, including china. China, are likely to suffer as exports to the U.S. wane. Economist predict global growth may decelerate close to the 3 percent, from a 4.7 percent rate in 2007. The contagion from the U.S. economy, which according to the IMF represents about 21 percent of the global economy, is spreading via multiple channels. Less spending by American consumers and companies reduces demand for imported goods. The meltdown of the U.S. subprime-mortgage market has pushed up credit costs worldwide and forced European and Asian banks to write down billions of dollars in holdings. Tumbling U.S. stock prices are dragging down markets elsewhere. There has been signs of economy contraction all over the world, like in Japan, Singapore, UK, and other european country.

Stock outlook 2008

Oil has been an influential factor in the global economy, because it is needed for the industry. Oil price increase will influence global industry, products price, consumer spending, and inflation. Price of oil has climbed more than 40% last year(2007), reaching its record high of $99.29 a barrel on November 21. After achieving that peak, crude prices gradually decline to the $80 to $90 range. Many analysts expect it to break the psychologically level of $100 a barrel early in 2008. Oil prices is mainly influanced by its supply and demand, and geopolitical risk. To understand this, we must know the numbers.

Producers1	Total oil production	Exporters2	Net oil exports	Consumers3	Total oil consumption	Importers4	Net oil imports
1. Saudi Arabia	10.72	1. Saudi Arabia	8.65	1. United States	20.59	1. United States	12.22
2. Russia	9.67	2. Russia	6.57	2. China	7.27	2. Japan	5.10
3. United States	8.37	3. Norway	2.54	3. Japan	5.22	3. China	3.44
4. Iran	4.12	4. Iran	2.52	4. Russia	3.10	4. Germany	2.48
5. Mexico	3.71	5. United Arab Emirates	2.52	5. Germany	2.63	5. South Korea	2.15
6. China	3.84	6. Venezuela	2.20	6. India	2.53	6. France	1.89
7. Canada	3.23	7. Kuwait	2.15	7. Canada	2.22	7. India	1.69
8. United Arab Emirates	2.94	8. Nigeria	2.15	8. Brazil	2.12	8. Italy	1.56
9. Venezuela	2.81	9. Algeria	1.85	9. South Korea	2.12	9. Spain	1.56
10. Norway	2.79	10. Mexico	1.68	10. Saudi Arabia	2.07	10. Taiwan	0.94
11. Kuwait	2.67	11. Libya	1.52	11. Mexico	2.03
12. Nigeria	2.44	12. Iraq	1.43	12. France	1.97
13. Brazil	2.16	13. Angola	1.36	13. United Kingdom	1.82
14. Iraq	2.01	14. Kazakhstan	1.11	14. Italy	1.71

NOTE: OPEC members in italics.

1. Table includes all countries with
total oil production exceeding 2 million barrels per day in 2006.
Includes crude oil, natural gas liquids, condensate, refinery gain, and
other liquids.

2. Includes all countries with net
exports exceeding 1 million barrels per day in 2006.

3. Includes all countries that consumed
more than 2 million barrels per day in 2006.

4. Includes all countries that imported
more than 1 million barrels per day in 2006.

Source: Energy Information Administration
(EIA). http://www.eia.doe.gov/emeu/cabs/topworldtables1_2.htm .

By looking at the above number (Exporters), we know that OPEC supplies more than 50% of the world demand. The top three importers are United States, Japan, and China. All three are the world economy giants.
From the demand and supply law, price will go up if supply is having trouble. Political conditions affect oil production in Iraq, Nigeria, Venezuela, and Iran. Iraq is still strugling to recover from decades of war. Nigerian production is affected by attacks and sabotage. Venezuelan oil production has never fully recovered since December
2002, when political strife brought Venezuelan production to a halt. Supply disruptions in Iran, the world's fourth-biggest exporter, is cause by a dispute with the West over
its nuclear program. Recently, tighter U.S. sanctions have also weighed on the oil price.
Strong economic growth has resulted in strong oil demand. The Paris-based International Energy Agency, or IEA - advisor to 27 industrialized nations - sees demand rising by 2.1 million barrels per day in 2008, an increase of 200,000 barrels per day from its previous forecast. The emerging market leaded by BRIC (Brazil, Rusia, India, and China) will still grows high. BRIC is in the top ten of the world oil consumer in 2006.
So what will happened to the oil price in 2008? Will it reach $100 a barrel due to higher demand and lower supply? Or it will go down due to price bubble? From the side of demand and supply, the price currently does not represents the situation. It is mainly affected by speculation on geopolitical risks in oil producer's country. Regarding geopolitical condition which is hard to predict, I think oil price in 2008 will average around $90-$110 per barrel.