Slipstream Wealth Blog

A repost fromt he e-book SlipStream Wealth found at http://www.slipstreamwealth.com Download the book today for the rest of this article and more.

The Bamboo Story Have you ever heard the story of the farmer that decides to not plant the traditional crops that the other farmers in his county plant? (It’s called the Bamboo story and I have taken pieces of it here to show you a few points. I have also boiled the story down a bit and adapted it to systems/methods trading) This is a guy that says to himself “there has to be better crops with different/better payoffs than the corn, wheat and soybeans I’ve been planting for the last 20 years”… So he set about the business of researching alternative crops. Making a living and supporting his family was critical, so he wanted to make sure he made a wise choice. Therefore, he began reading, researching and speaking with experts with more knowledge than he before making his final decision. After studying a variety of options, he decided on Bamboo. The climate, soil conditions and equipment at his disposal could make growing and harvesting bamboo a profitable business. He was convinced he was making the wisest choice and began making the changes needed to become a Bamboo Farmer. Now remember, this farmer lived in a farming community. For generations his neighbors had all grown traditional crops like corn and wheat. You can only imagine how the idea of growing bamboo was received. Upon telling his fellow farmers his idea, they mocked him calling him foolish, all the time warning him of his impending peril. They were unwilling to accept change or progress. However, the farmer was unshaken; he had done extensive research and was confident of his knowledge. He would not back down from the belief that he could grow bamboo and even turn a substantial profit in the business. Well, if you know anything about bamboo, you know that the first year it’s been planted…nothing happens. You don’t get so much as a twig or a leaf! His neighbors were ruthless. They had all harvested their crops while he had nothing at all to show for his efforts. He was undaunted and confident in his knowledge. But wait, there’s more bad news. The second year nothing happens either, not a sign of a bamboo tree anywhere. Again he was forced to endure a second year of ridicule by his heartless neighbors. Still, he was unshaken in his confidence. The third year came and guess what? Bamboo; everywhere bamboo. His crop grew 4 to 6 inches a day! By the end of the summer he had a virtual bamboo forest. He harvested his crop and sold it for a huge profit. His neighbors were astonished. In fact, several who had once ridiculed him began to show interest in becoming bamboo farmers as well. The farmer went on for many years enjoying the benefits of his new crop, bamboo. He and his family enjoyed a very happy and successful life, unafraid of growth, progress or change, confident and determined when facing challenges. This story teaches us two lessons. First, when you have knowledge you have tremendous power. Knowledge itself isn’t power; it’s the application of it that gives power. Knowledge gives you confidence to pursue your dreams and goals… Regardless of what others think or what may happen in the short run. The second lesson is that just because we don’t see immediate progress, doesn’t mean we should give up. The reason the bamboo tree doesn’t grow until the third season is because it spends the first two years growing roots, building a foundation so that when it is ready to grow it will have the stability to stand tall reaching tremendous heights. Without those roots, the tree would fall over with the first strong wind. Had the farmer lost faith, had he not had confidence in his knowledge, he might have tilled the crop under during the first or second year and created disaster for himself and his family.

A repost fromt he e-book SlipStream Wealth found at http://www.slipstreamwealth.com Download the book today for the rest of this article and more.

INFLUENCES ON AN OPTION’S PRICE

There are six factors that influence the price of an option.  These are not necessarily listed in the order of importance.

            1. Price of the underlying instrument.

            2. Striking price of the option.

            3. Amount of time remaining until expiration.

            4. Volatility of the underlying instrument.

            5. Short‑term interest rates, generally defined as the 90‑day T‑bill rate.

            6. Dividends (if applicable).

 Each of these six factors has an influence on the price of an option. In fact, each has a direct effect, causing the option to become more or less expensive as the factor itself increases. An easy one to discern is that the more time remaining until expiration, the more expensive the options will be. Conversely, as time decreases, so do option prices. Thus, option prices are directly related to the time remaining, as one factor. Interest rates also work in a more complicated manner, although that is not quite as obvious.

            Sometimes the factors affect calls differently than puts. For example, as the underlying’s price increases, calls get more expensive while puts get cheaper. Dividends, also, have opposite effects on puts and calls. If a company increases its dividend, calls will be cheaper and puts will get more expensive. This is because the listed options do not have any right to the dividend. The options’ prices merely reflect what the stock price will do, and if the dividend is increased, it will drop farther when it goes ex‑dividend; thus, puts increase in value to account for the expected ex‑dividend drop in stock price, and calls get cheaper.

repreinted from article by Lawrence Mcmillian at http://www.slipstreamwealth.com

THE COST OF AN OPTION

The cost of an option is, of course, called the price, but it is also referred to as the premium.  If someone tells you that the XYZ July 50 call is trading at 3 (and we know that the option is for 100 shares of XYZ), then the actual cost of the option is $300. Thus, one option trading at 3 costs $300 and “controls” 100 shares of XYZ until the expiration date.

            The cost—in U.S. dollars—of any particular futures option depends, of course, on how much of the commodity the futures control. We have already said that a futures option “controls” one futures contract. But each futures contract is somewhat different. For example, soybean futures and options are worth $50 per point. So if someone says that a July Soybean 600 put is selling for12, then it would cost $600 (12x $50) to buy that option. However, S&P 500 futures and options are worth $250 per point, so if a Dec S&P 1500 call is selling for 7, then you have to pay $1,750 (7 x $250) to buy it.

reprinted from article in http://www.slipstreamwealth.com