Investing: June 2008 Archives

If you use Yahoo! Finance to get up-to-date investing information, perhaps you've clicked on that "Options" link when viewing a stock quote.

On that page you might see some familiar terms, but some might be mysterious.  Let's see what I can do to demystify that content.

I learn best with help from examples, so I'll walk you through one.  I randomly chose FCX - Freeport-McMoRan Copper & Gold.  See below for a screen snapshot from June 25, 2008 with numbered labels; sorry if they're a little confusing!

1. Company name: Freeport-McMoRan Copper & Gold Inc.
2. Stock ticker: FCX
3. Recent trade information: time of trade, price per share, dollar change for the day, percent change
4. Expiration of options: Options "expire" or are only good until a certain date, since options provide the right (but not the obligation) to buy/sell at a certain price by a certain date.  That "certain date" is called the "expiration."  Only the month and year pairs appear in these links because, magically, options always expire on the third Friday of any given month.  If you want to see data on options that expire in Nov 08, for example, you would click the Nov 08 link.
5. Option type: There are two standard types of options: "call" and "put."  One call option contract provides the contract holder the right, but not the obligation, to purchase 100 shares of the corresponding stock at a certain price by the expiration date.  The top section shows data on call options; more on put options in (8).
6. Expiration date: This header area shows the exact date when the displayed options expire.
7. Advertisements: Horizontally across the top you'll find (typically broker) ads, and you'll find more ads on the right-hand side.
8. Option type: One put option contract provides the contract holder the right, but not the obligation, to sell 100 shares of the corresponding stock at a certain price by the expiration date.  This bottom section shows data on put options.
9. Strike: The strike price is the dollar amount at which the contract holder can buy or sell the underlying shares.
10. Symbol: Since options contracts can apply to different stocks (FCX in this case), have different types (call/put), strike prices (85, 90, ...) and expirations (Jul 08, Aug 08, ...), it's helpful to identify all that in one little symbol.  When you buy or sell an option, you'll need this symbol to identify what you're buying or selling.  For help decoding these symbols, check out this Investopedia page.
11. Last: Just like stocks, options contracts can have some monetary value. The last represents the price* at which that particular options contract changed hands.  *I say price, but remember that options contracts are good for 100 shares.  I like to think of the last as a per share price.  That being the case, to figure out the dollar value of an options contract you should multiply the last by 100 (or simply move the decimal point two places over).  So, for example, symbol FCXGQ.X last changed hands for $3,225 (32.25 * 100).
12. Chg: Options contract prices can move up and down, so the Change represents how much the last has changed since the trading day started.
13. Bid: The bid represents the highest price someone is willing to pay for at least one options contract at that moment.
14. Ask: The ask represents the lowest price at which someone is willing to sell at least one options contract at that moment.
15. Vol[ume]: The volume represents how many of that options contract have changed hands that trading day.
16. Open Int[erest]: The open interest represents how many outstanding contracts there are of a particular option.  Let me clarify what I mean by "outstanding contracts."  Go to the PUT OPTIONS section and look at the 85 Strike.  Now look at the Open Int column: 612.  That 612 means there are 612 put option contracts out there with strike price 85 and expiration in Jul 08.  If I were to write 10 new put contracts at the Bid price of 0.20, at that moment the Open Int number would rise to 622 (612 + 10 = 622).  If I were to buy 10 of those put options contracts and exercise them, the number would fall to 602 (612 - 10 = 602).  In a later entry I'll describe what it means to write options contracts.

There is plenty more to learn about even just Yahoo!'s options pages, but I hope that breakdown is helpful!  Options can be very confusing, complicated, and risky, so PLEASE do your own careful research before trading options.

Disclosure: I have no position, long or short, in FCX.

I have a hard time selling shares shares at a loss.  Being (an especially self-competitive) human, I hate accepting defeat.  I was mad at myself for not selling higher earlier, back when my gut told me to take some off the table.

Ever been in that spot?

I recently sold off half my position in FedEx (FDX).  I've been a shareholder for several years now, and I watched the shares make a healthy climb from sub-$100 to $120.  Then they fell back down, and then they fell even farther down.  I followed my own rules and bought some on the way down as I periodically re-evaluated the business, so where did I go wrong?

Initially I had bought into FDX as a relatively stable beneficiary of increased Internet commerce.  When people buy "stuff" over the web, they expect to receive it.  More and more people are buying more "stuff" online, so more and more "stuff" gets shipped.  I liked FDX's valuation at the time, and figured I could watch the shares rise steadily without worrying about the sometimes emotionally challenging and sharp fluctuations of the e-retailers (like Amazon).

Was my thesis wrong?  I'm not sure.  I don't think it was wrong, but I didn't foresee $130+ oil.  My macro-picture was off.  Like many folks, I have a diversified portfolio.  While I increased my weighting of energy holdings within the last year, I also bought more FDX as it descended.  Those energy holdings have seen some nice gains (and I've taken some profits in that sector), but FDX?

FDX can operate like a perfectly-oiled machine, but they can't do anything to make one of their significant input costs -- oil -- go down.  Honestly, I hope that the oil bubble will pop soon.  I don't know that it will, and so I decided to trade some FDX for cash.  Until oil gets cheaper, I don't see any catalysts to drive FDX's shares higher.

Am I accepting defeat?  I don't know, for sure, that I'm being defeated.  I hate selling for a loss -- even a small one.  I shouldn't feel too bad, because a lot of people didn't predict that oil prices would rise this high as quickly as they have.

Whatever you want to call it, I've reduced my exposure to FDX.  If the bubble pops, maybe we'll see a bounce and I can catch some upside.  In the meantime, I'm happy to have some cash on the sidelines.

Disclosure: I am long on FDX at the time of writing, but I recently cut my position in half.  I do not own any position, long or short, in AMZN.