A new year....

I suppose after a rough 2008 I can do better in 2009. That is not the case though. As of today my account's outstanding balance is $115. Take note of the fact that every two weeks I put in $1200 into the account and I have done this more than 26 times. I have probably lost over 70k to date and once I have my taxes done I can post my 2008 grand total of losses.

I wanted to start organizing my life. 2008 was a very in-productive year for me. A year I would want to forget. 2009 is not starting out any better. I was gradually load my trades up onto the blog in search of a education for myself on why I make the mistakes I make.

My first trade for 2009:

Daily Chart for the Past Three Months on XLF

Technically I purchase the options in 2008 but they expired in January 2009 and I held them pass 2008 so I am considering this trade as part of my 2009 trades. In any case the purchase was a dismal failure. Clearly the options expired below the call value, this is call "out of the money", option. Out of the money options are worthless once it expires. The opposite of out of the money options are "in the money options."

For reader's expansion of knowledge during the day of option expiration any in the money options are automatically transfer into stock purchases and the premium of the option becomes worthless. Follow this example. If I purchased one Nov '08 50 call option of MOS for $1 premium the total cost of my investment is $100+commissions. The $100 is called the option's total premium cost. Total premium is calculated by option premium times 100. Every option that has yet to expire has a premium. The premium will be zero once the option expires. Ergo all options will always end up having no worth.

Each option is a contract between a seller and a buyer. The example has me as a buyer of one call option. Each contract is the given opportunity to purchase 100 common shares of the stock. If MOS was to hit $(50+1) or above by Nov '08 I would make a profit but if it does not I loss my $100. Lets just say MOS reaches $53 by Nov '08 expiration. My brokerage will automatically transfer 100 common shares of MOS into my account in exchange of $5000+commissions. Now note that my $100 spent on purchasing the option is gone. Vanished! The $100 is gone period.
What I do have is 100 shares of MOS. If I sell the stocks at $53 then I would have gained a total of $200-commissions. I can also keep the shares and not sell it. The shares are just like any other shares a investor can purchases therefore they do not expire. You have just witness an in the money option. In the case of out of the money the option's premium is zero at expiration date and owner of the option gets nothing. (Note brokerages will always transfer you the shares in exchange of dollars when options are in the money. Brokerages do allow investors to ask not to make the exchange, but no investor would do that because the options will become worthless even if it is in the money.)

Usually investors do not hold options on expiration. There are a couple of reasons why. One investors tend to trade options through its premium just like they trade stocks through the stocks' price value. Second investors may not have the actual amount of cash required to make the exchange for in the money options. For instance in the example earlier if I did not have at least $5000 in my account then I would not be able to purchase 100 shares of MOS.

Options always expires every third Friday of a month. If you short a call or put option there is a SEC fee. I only found this out when I read my account balances. Usually the fee is about $0.01 per option. Click Link for more info.

OK back to the trade I made on XLF. I purchased 2calls@17 for $0.08 premium. What I was thinking was financial stocks would stop following. I was wrong and the end result was I lost $16+commissions.

Mistake 1) Never try to catch a falling knife. If the stock trend is downward, then don't expect its value to rally up any time soon. As simple as that.