<p>While everyone is right to congratulate bearcats on his success here, please recognize the risk he took before you try the same thing. He invested $16,000 in Google puts and calls. If, instead of posting better-than-expected earnings (or worse-than-expected earnings), Google had merely matched expectations (which is generally the most likely thing to happen, since the people whose "expectations" count are usually smart, sophisticated, well-informed, and work hard to figure out what they think is going to happen), then he could have lost substantially all of his investment. Trading in options is a super-risky investment strategy, as you can tell by the fact that he made the kind of return that you would need to justify a super-risky investment strategy. If you do it a lot, you are going to lose more often than you are going to win, and if you keep doubling down the way he did, you could lose big. It's like going to the racetrack or the casino: exciting, great if you win, but you shouldn't do it with your rent/food/tuition money, money you can't afford to lose.</p>
<p>Here's how it works:</p>
<p>Let's say Google stock sells for $100 today. You can buy a call option to buy 1,000 shares of Google @ $100 any time in the next month for about $3,500, and a put option to sell 1,000 shares of Google @ $100 for about the same price (actually, always a little less than the call, because everything being equal stock prices for companies that don't pay dividends should rise over time). If you BOUGHT 1,000 shares of Google, it would cost you $100,000, plus commissions, but you can get the options position for $7,000 plus commissions.</p>
<p>If Google stock goes up to $105 next week, your call option is going to be worth about $8,000, but your put option is going to be worth maybe $1,000. Approximately the same thing, in reverse, if the stock goes to $95. You could sell both options for $9,000 combined (and pay more commissions), and you would have a pretty nice profit for a week's investment. If it went to $120, your call option would be worth about $20,500, and your put option would be worth close to $0 (and it would be the same or a little better, in reverse, if the stock went to $80). There you would have almost tripled your money.</p>
<p>But look what happens if Google stays around $100/share. Most stocks don't move 20%, or even 5%, over the course of a month. The "option premium" part of the value of an option -- and in this example, where the options are bought "at market", 100% of the value is option premium -- declines every day as the expiration date gets closer. (It also declines as the stock price moves farther away from the option price.) So, if Google basically stays where it is for the week, your $7,000 options investment may be worth only $5,000. If you wait until the end of the month, it will be worth nothing. Taking commissions into account, you may have lost 1/3 of your investment in a week, whereas if you had bought Google stock itself you would not have lost anything.</p>
<p>The more likely a stock is to jump around in price, the more expensive it will be to buy options close to market. You can get bigger bang for your buck if you buy options a little off market (in the above example, say call @ $102 and put @$98), but then of course you are increasing the likelihood that your "straddle" -- that's what the offsetting options position is called -- will decline in value. If bearcats really turned $16,000 into $400,000 with two trades, he was not buying the options at market, so he was taking pretty considerable risk.</p>