For investors interested in getting started with options, it can be difficult to determine whether an options position is profitable.
In this segment from Motley Fool Live that first aired May 7, Motley Fool Canada analyst Jim Gillies and Fool.com editor/analyst Ellen Bowman discuss the way to determine your success.
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Jim Gillies: Here's a dirty little secret Fools, much like if you buy a stock, you might sweat over the way the stock moves day-to-day and you probably shouldn't by the way. You are familiar with the company Overstock (NASDAQ: OSTK) Ellen?
Ellen Bowman: I am familiar with Overstock, yes.
Gillies: Overstock is trading today, I think around 80, $85 or something. But in the past 12 months, I think it's traded as low as three dollars and as high as 130. What's the right price for Overstock?
Gillies: I don't know. But if I tell you I recommended the stock, I think in Hidden Gems Canada, I recommended it in the mid-sixties, I think. And now it's in the mid-80s. If you just take the start point, the endpoints, you might wonder what's all the fuss, right? I bought it at 60, now it's 80. Good job, it's a good deal. Same thing with options, except, because of options are leveraging instruments, the percentage moves up and down, can be more stomach-churning then can be stock. The important word there is closed trades. At the end of the position, at the end of the strategy, do you have more money than when you started? If so, tick in the yes box.
Bowman: One of the things, when I was new to this service that I didn't quite understand too, is that the options can go way above your strike price way below in the entering time before expiration and it doesn't really matter if you care about expiration, if you care about where it is at the beginning and you care about where it is at the end and it can do whatever it wants in between, which is stomach-churning even, Netflix is mine that I've written for more than a decade up and down and all around. But in the end, it's been a lovely investment.
Ellen Simonson Bowman has no position in any of the stocks mentioned. Jim Gillies has no position in any of the stocks mentioned. The Motley Fool recommends Overstock.com. The Motley Fool has a disclosure policy.