Trading Options On Bank Stocks

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Trading Options On Bank Stocks

Trading options on bank stocks may be more volatile than usual now that JPMorgan has admitted to $2 Billion in losses on credit default swaps. These are the same kind of vehicles that caused such substantial losses during the stock market crash of 2008. The admission by JPMorgan in an after-hours conference call brings to mind the ongoing need for regulation in the securities industry. For those trading options on bank stocks it brings to mind the need to keep close tabs on the actions of and credit worthiness of banks. Up until the news about JPMorgan concerns about trading options on bank stocks centered on questions about Euro Zone Austerity or growth. Now options traders need to be concerned about whether back room hedge fund tactics are going to sink an otherwise profitable bank. The other question is whether or not other banks are also hip deep in the same tactics and at risk for the same level of losses, or worse.
Limiting Risk
The good thing about trading options on bank stocks is that by purchasing options on these stocks the trader limits his risk. Buy a call on JPMorgan and you stand the chance of making money if the stock goes up in price. When buying a call you purchase the right to buy the stock in question at the contract or strike price and can then sell it at a new and higher price when the stock goes up. You can also simply sell the call option which is not worth more. If you buy a call option on JPMorgan and it turns out that the losses on credit default swaps are worse than anticipated you will not make money. However, you will never lose any more than the price of the options contract. More likely you will sell you the call contract at a loss prior to expiration and further limit your losses. If you expect JPMorgan stock to fall further you can purchase a put on the stock. This gives you the right to sell the stock at the contract or strike price even if the price falls dramatically lower. As with calls you can simply sell the contract which is now worth more money. And, if it turns out that JPMorgan pulls a bunny out of the proverbial hat and limits its losses on credit default swaps? Well, then you will not make any money on a fall in stock price but you will limit your losses to the price of the options contract or sell the contract and limit your losses even more. A useful way to profit if the stock goes up or down is called a long straddle. In this case you purchase both a call and a put.
Leveraging Investment Capital with Options
In trading options on bank stocks in a situation like JPMorgan’s the options trader enjoys a degree of leverage on his capital. If he buys calls and/or puts his investment is the cost of the options contract. He need never take possession of the stock in question so he does not need to come up with money to buy stock.

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Trading Options On Bank Stocks

  1. 1. Trading Options on Bank StocksBy www.Options-Trading-Education.com
  2. 2. Trading options on bank stocks may bemore volatile than usual now that JPMorganhas admitted to $2 Billion in losses on creditdefault swaps. www.Options-Trading-Education.com
  3. 3. These are the same kind of vehiclesthat caused such substantial lossesduring the stock market crash of 2008.www.Options-Trading-Education.com
  4. 4. The admission by JPMorgan in an after-hours conference call brings to mind theongoing need for regulation in the securitiesindustry. www.Options-Trading-Education.com
  5. 5. For those trading options on bank stocks itbrings to mind the need to keep close tabson the actions of and credit worthiness ofbanks. www.Options-Trading-Education.com
  6. 6. Up until the news about JPMorganconcerns about trading options on bankstocks centered on questions about EuroZone Austerity or growth. www.Options-Trading-Education.com
  7. 7. Now options traders need to be concernedabout whether back room hedge fundtactics are going to sink an otherwiseprofitable bank. www.Options-Trading-Education.com
  8. 8. The other question is whether or not otherbanks are also hip deep in the same tacticsand at risk for the same level of losses, orworse. www.Options-Trading-Education.com
  9. 9. Limiting Riskwww.Options-Trading-Education.com
  10. 10. The good thing about trading options onbank stocks is that by purchasing options onthese stocks the trader limits his risk. www.Options-Trading-Education.com
  11. 11. Buy a call on JPMorgan and you stand thechance of making money if the stock goesup in price. www.Options-Trading-Education.com
  12. 12. When buying a call you purchase the right tobuy the stock in question at the contract orstrike price and can then sell it at a new andhigher price when the stock goes up. www.Options-Trading-Education.com
  13. 13. You can also simply sell the call option whichis not worth more. If you buy a call option onJPMorgan and it turns out that the losses oncredit default swaps are worse thananticipated you will not make money. www.Options-Trading-Education.com
  14. 14. However, you will never lose any more thanthe price of the options contract. More likelyyou will sell you the call contract at a lossprior to expiration and further limit yourlosses. www.Options-Trading-Education.com
  15. 15. If you expect JPMorgan stock to fall furtheryou can purchase a put on the stock.This gives you the right to sell the stock atthe contract or strike price even if the pricefalls dramatically lower. www.Options-Trading-Education.com
  16. 16. As with calls you can simply sell the contractwhich is now worth more money.And, if it turns out that JPMorgan pulls abunny out of the proverbial hat and limits itslosses on credit default swaps? www.Options-Trading-Education.com
  17. 17. Well, then you will not make any money on afall in stock price but you will limit yourlosses to the price of the options contract orsell the contract and limit your losses evenmore. www.Options-Trading-Education.com
  18. 18. A useful way to profit if the stock goes up ordown is called a long straddle. In this caseyou purchase both a call and a put. www.Options-Trading-Education.com
  19. 19. Leveraging Investment Capital with Optionswww.Options-Trading-Education.com
  20. 20. In trading options on bank stocks in asituation like JPMorgan’s the options traderenjoys a degree of leverage on his capital. www.Options-Trading-Education.com
  21. 21. If he buys calls and/or puts his investment isthe cost of the options contract.Commonly in stock options trading the tradersimply sells his contract for a profit. www.Options-Trading-Education.com
  22. 22. The profit will be the difference betweenstrike and spot price of the stock while theinvestment will be an options contract andnot purchase of the stock. www.Options-Trading-Education.com
  23. 23. As usual we are not suggesting tradingoptions on bank stocks like JPMorgan orothers.We offer this discussion as an example ofthinking through an options trade. www.Options-Trading-Education.com
  24. 24. For more insights and useful informationregarding options and options trading, visit
  25. 25. www.Options-Trading-Education.com

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