How To Use This Site

Please don't make the mistake of assuming that GrayMetalBox is just another cute site that offers stock quotes. This is a very powerful site that offers services you can't find anywhere else. As far as we know we are the first and only site that gives you this valuable information. And valuable it is!

If you'll take just a few minutes and soak up the information that's here, I promise you that you'll find trades that you wouldn't otherwise have a clue about. Not only that, you'll see trades you should stay away from! When you see the whole picture it's much easier to make a decision.

Below is some powerful stuff. Let's start with the easiest to understand:

Buying Calls

If you are bullish on a stock, the greatest rewards can come from buying calls. Calls use maximum leverage, but they can be risky. Buying far out-of-the-money calls is quite risky because the stock has to go up considerably for the option to be profitable. You have to choose the "right" option.  

One of the best ways to choose which calls to buy is to start your search with an at-the-money call.  If the volatility is low, the options can be fairly inexpensive. If high, then the options will be quite costly. Notice below that while JDSU is at 40, the at the money call is selling for 4.62 points. That entire 4.62 points is for time value only. You're buying nothing but time. 

Then look at the option that is one strike price in-the-money, the 35. You'll see that you don't pay as much for time-value. The option actually costs more than an at the money option, but you're not paying as much for the time. You gain some intrinsic value. Look at a lower strike price still.  The lower you go the less you have to pay for time value, even though the option price gets higher. It's like you're buying more of the meat and less of the refrigeration. You're buying more intrinsic value and paying less for the time value.  

If your intention is to use the option as a proxy for the stock, you'll likely find the best options that are 2 or 3 strikes in the money. This is usually the best option if you are quite confident the stock is headed higher. However, if you have significant doubts and just not so sure of yourself, especially in a volatile market, then you might step up and play with cheaper out of the money calls. Your likelihood of success diminishes, but then you don't have as much money on the line if you're wrong.

Selling Puts

If you want to buy calls on a stock but discover the cost is way too high, then you should instantly think of selling puts. That's the logical next step in developing a plan. Many times I've wanted to buy stocks on a fast moving momentum stock only to find that an at the money option would cost in the neighborhood of $2000. Under most market conditions I don't want to risk that much for a call. So I immediately check out the puts.  Maybe the at the money puts have a bid price of 17 or 18.  If you sell that option for 17 and if the stock continues a few points higher and a couple of days pass, you might be able to buy that put back for 10 and you've had a great trade. Whereas the call option might not have gained much at all. Selling puts is a great way to make some quick money, but you have to understand the high risks involved. If the stock goes down a lot, there can be some big losses.

The House in the Hamptons

One of the very best trades, regularly used by professional traders, is a credit spread.  Did you know that you can use a credit spread whether you are bearish or bullish? This is a strategy that is often overlooked by beginners, but is a favorite among professionals. It is the trade that paid for "the house in the Hamptons," as quoted by some who own those lavish mansions.  It provides profits more consistently than any other strategy. It has a built-in safety mechanism and can be used in all types of markets. And very importantly, it allows you to sleep at night. In fact, it is the trade that should be used by beginners. 

When IBM was trading at 87 3/4 the spreads below were available: 

Start by looking at the spread which is closest to the money. That is the highest yielding spread. In this case you'd sell the 85 put and buy the 80 put for a credit of $125 (1 1/4 points).  As long as the stock closes above 85 on expiration day you keep the entire credit which would yield you 25% on your investment.

But let's say that you want safety!  Then look for a lower strike to sell. Looking at the table we see that we could sell the 75 put and buy the 70 put and earn a credit of $43.75.  Now our yield is not as great but our safety factor just jumped way up.  IBM could drop all the way to 75 and we'd still have a successful trade.