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Option Myths

Miss Information on CNBC is not just another pretty face talking about Dow 20,000. However some erroneous statements are always fun to point out.

I am watching "Options Actions" on CNBC when the talking head tries to explain an option trade setup. I will paraphrase the actual comment, but it goes along these lines. "With XYX stock at 115, the trader who buys the $90 put ( paying 40 cents ) needs the stock to move 25 points in 45 days for the position to become profitable. ( insert laugh track here ).

I could insert some rant at this point about the CNBC being a loooooong only network, but I have certainly heard similar comments in other venues. I will save this for a later post !

Of course the stock does not need to drop to 90 for the position to make a profit.

One example sees XYZ stock dropping from 117 to 110 within the next week. ( still well above the $90 strike price and 40 days to expiration ) however the option purchased above for 40 cents is now worth 60 cents for a 50% profit ( excluding commission ). So a very different take on the CNBC perspective !

There are many more variables that go into option pricing and some may quibble at the simplistic rebuttal that I have described, but still my points are valid. And, quite a bit of information available regarding option pricing via search for those wishing to read the rest of the night.

However, I have a date with a frosted mug and yesterday's lasagna.