pirates and put options

Pirates and Put OptionsHow They Can Steal You Blind!

What is a Stock Option?

• A Stock Option is the right to buy or sell a basket of stocks at a set price (usually in lots of 100).

Options are Cheaper!

• Than owning the actual stock.

• For example: You want to buy 100 shares of Pyrate Stock, where one share costs you $80.

• You would have to put up $80 times 100

• It would cost you $8,000 for 100 shares of Pyrate stock.

When you Buy an Option…

• You can rent the 100 shares from someone that actually owns the stock.

• You pay a very small premium for a short rental period (IE: 30, 60, 90 days.)

• You can benefit if the stock goes up or down.

Lets pretend I Buy…

• 4 shares of Pyrate for $320 because I think the price is going up over the next 30 days.

• I am right and Pyrate goes from $80 a share all the way to $100. I sell all 4 shares for $400.

• I made $20 times 4 shares of stock = $80

If I had bought an Option

• I could have paid $320 to “rent” the stock for 30 days at the guaranteed price of $80 per share.

• I would have controlled 100 shares of stock.

• I would have made $20 on 100 shares of stock= $2,000 for the same investment of $320.

But….

• The guy that let me “rent” the stock for 30 days would have had to sell his 100 shares to me for the agreed upon price of $80 per share.

• He would have lost $2,000 when the stock went from $80 to $100!!!!

In the World of Options

• Someone always wins.

• And Someone always loses.

You can Also Make Money…

• When the stock price goes down.

• This is called a “Put” Option.

Here is How a “Put” Option Works

• I think that Pyrate is going down in price.

• I pay you a “premium” of $320 to guarantee that you will buy 100 shares of Pyrate for the current price of $80 per share for the next 30 days.

• You have to put money aside to “cover” the Put Option contract.

You have to Cover the Option!

• If the price of Pyrate goes down $40 per share in the next 30 days you still have to buy 100 shares from me at $80 per share no matter what!

You lose $4,000!

• I buy 100 shares of Pyrate at $40 per share and sell it, according to our Option Contract, back to you for $80 per share.

• I make $40 times 100 = $4,000

Before 9/11

• Someone bought millions of dollars in “Put Options” against American Airlines and other Airline companies!

That Someone (s)…

• Made 100’s of millions of dollars when the Airline stocks “tanked”!

But, that’s “Chump Change”

• Why Buy a Put Option against 1 company when you can “short” a whole bunch of companies at the same time.

• This used to be illegal!

• Not anymore!

What if…

• You could buy a “Put Option” against the entire S&P 500 Index!

• Or the Dow?

• Or the Nasdaq?

• Or any other index out there?

With the S&P 500

• You could “short” 500 of the largest corporations in America!

• You could make billions or even trillions of dollars in a few short weeks!

• But, who would be stupid enough to guarantee a “Put Option” in a declining market? Who has that kind of money to lose?

How About…

• Your Mutual Fund…they have millions of dollars to lose. Of course, its only your money they are putting at risk.

Or Even…

• Your State Employee Retirement Plan.

• Your Company 401K Plan

• Your IRA

• Your SIMPLE plan

• All invested in the stock market…

No-ones That Stupid!

• Why it would take a whole band of Pirates to orchestrate such a heist!!!

One on the “Inside”

• Using your money to guarantee the Index Value! This guy “sells” the Put Option.

And One on The Outside..

• This Guy Buys the Index Put Option at just the right time!

And One More Pirate…

• Who knows of some major event that is going to shake the Western World so hard that it will bring the entire U.S. stock market into a free-fall within the next 30 days.

But Hey, That Would Take a Conspiracy!!!

• And who wants to be called a conspiracy theorist?

Have You Read the News?

• NEW YORK (Reuters) - The Dow Jones industrial average and the S&P 500 turned negative after midday on Thursday, rattled by a report that nerve gas had been found at the United Nations headquarters.ABCNews.com reported that United Nations weapons inspectors discovered six to eight vials of a dangerous nerve gas, phosgene, as they were cleaning out offices at a U.N. building in New York this morning."We don't yet know if that's true or not but it's very unnerving," said Todd Leone, head of listed trading, Cowen & Co. in New York.The Dow Jones industrial average was down 12.11 points, or 0.09 percent, at 13,277.18. The Standard & Poor's 500 Index was down 1.83 points, or 0.13 percent, at 1,461.93. The Nasdaq Composite Index was up 14.74 points, or 0.58 percent, at 2,577.90. (9/1/07)

Now Here is Where You Feel That “Sinking Feeling”

• “There are 65,000 contracts @ $750.00 for the SPX 700 calls for open interest. That controls 6.5 million shares at $750 = $4.5 Billion. Not a single trade. But quite a bit of $$ on a contract that is 700 points away from current value. No one would buy that deep "in the money" calls. No reason to. So if they were sold looks like someone betting on massive dislocation. Lots of very strange option activity that I haven't seen before.”

Someone is Betting That

• The S&P 500 Index which closed on 8/31/07 at 1473 will drop below 700!

• That means the Buyer of the Options Believes that the stock market will lose over 50% of its current value by 9/21/07 (when the options expire!)

That Means…

• Someone(s) bought 65,000 Put Option Contracts that expire in less than 21 days!

• If something doesn’t happen to drive the S&P below 700, they will lose $4.5 billion in Premiums ($750 per contract).

What Do They Know?

• They are betting $4.5 Billion dollars on a guess? A Hunch? What?

Could It be…

• A major Terrorist Attack on United States soil that makes 9/11 look like “child’s play”?

Looks like Someone Just Placed a Major Bet Against America!

• $65 BILLION DOLLARS!!!!

If They are Right…

• They could end up with half of the money that is now in the Stock Market…

Here’s Hoping…

• None of It Belongs to You!