Financial Markets For The Rest Of Us|
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
paid an $11 premium for those contracts (they would have a $1 loss per share) - yet another risk of options. Finally if a company is being acquired on a stock swap basis, the company's stock options may be converted to the new company's stock options according to the stock conversion. Again if a clean conversion cannot be achieved, those options may linger until expiration and be handled on a pre-merger basis.
You may now wonder about how to tell if a certain option is a normal one, or one of these irregular varieties brought on by splits, mergers, etc. For one thing, your broker should be able to help you there. If you use an online broker, the irregular options may have an identifying mark or you may just be able to recognize them based on their unusual strike prices or their premiums. They still could be difficult to spot so look before you leap (no pun intended). If you are not completely sure, ask your broker for clarification.
Analyzing options involves pretty much a technical approach. Unlike stocks where one can engage in fundamental analysis for the company, options by nature do not lend themselves to fundamental analysis. Of course, one could always engage in an indirect fundamental analysis of options by studying the fundamentals of the company whose stock is the underlying product, but this may be more applicable for LEAPS, whose expiration dates are further out into the future and therefore have some relative longevity.
On the other hand some relevant technical analysis on the underlying stock may be very useful to possibly determine the profitability of an option. One of these analyses would be to examine the volatility of the underlying stock. As we know now, options are very …
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