12

You appear to be thinking of option writers as if they were individuals with small, nondiversified, holdings and a particular view on what the underlying is going to do. This is not the best way to think about them. Option writers are typically large institutions with large portfolios and that provide services in all sorts of different areas. At the same ...


10

If the buyer exercises your option, you will have to give him the stock. If you already own the stock, the worst that can happen is you have to give him your stock, thus losing the money you spend to buy it. So the most you can lose is what you already spent to buy the stock (minus the price the buyer paid for your option). If you don't own the stock, you ...


9

If you buy a call, that's because you expect that the stock will go up. If it does not go up, then forget about buying more calls as your initial idea seems to be wrong. And I don't think that buying a put to make up for the loss will work either, the only thing that is sure is that you will pay another premium (on a stock that could stay where it is). Even ...


8

I do this often with shares that I own - mostly as a learning/experience-building exercise, since I don't own enough individual stocks to make me rich (and don't risk enough to make me broke). Suppose I own 1,000 shares of X. I don't expect my shares to go down, but I want to be compensated in case they do go down. Sure, I could put in a stop-loss order, ...


8

In terms of the risk graphs, your thought process is correct. If you combine a Short Butterfly with a Long Straddle, you end up with the risk graph of the green line. Unfortunately, because options cost money, there are no free lunches and that is the error in your assumption. Now I know that you're not going to accept that explanation on face value so ...


7

SELL -10 VERTICAL $IYR 100 AUG 09 32/34 CALL @.80 LMT 1) we are talking about options, these are a derivative product whose price is based on 6 variables. 2) options allow you to create risk out of thin air, and those risks come with shapes, and the only limit is your imagination (and how much your margin/borrowing costs are). Whereas a simple asset like ...


5

I've traded covered calls now and then. This is a recent trade. Bought 1000 shares of RSH (Radio Shack) and sold 10 calls. So, I own the stock at a cost of $6.05, but have to let it go for $7.50. There's a 50c dividend in November, so the call buyer will call it away even if the stock trades below the strike. So, I'm expecting this is a 10 month trade for a ...


5

For personal investing, and speculative/ highly risky securities ("wasting assets", which is exactly what options are), it is better to think in terms of sunk costs. Don't chase this trade, trying to make your money back. You should minimize your loss. Unwind the position now, while there is still some remaining value in those call options, and take a short-...


5

I would make a change to the answer from olchauvin: If you buy a call, that's because you expect that the value of call options will go up. So if you still think that options prices will go up, then a sell-off in the stock may be a good point to buy more calls for cheaper. It would be your call at that point (no pun intended). Here is some theory which ...


5

So, yes, you may be having the inevitable epiphany where you realize that options can synthetically replicate the same risk profile of owning stock outright. Allowing you to manipulate risk and circumvent margin requirement differences amongst asset classes. Naked short puts are analogous to a covered call, but may have different (lesser) margin ...


5

Has anyone done this before? I'm sure someone has, but it doesn't completely remove any price risk. Suppose you buy it at 10 and it drops to 5? Then you've lost 5 on the stock and have no realized gain on the option (although you could buy back the option cheaply and exist the position). To completely remove price risk you have to delta hedge. At ATM ...


4

The broker would give you a margin call and get you to deposit more funds into your account. They wouldn't wait for the stock price to reach $30, but would take this action much earlier. More over it is very unrealistic for any stock to go up 275% over a few hours, and if the stock was this volatile the broker would be asking for a higher margin to start ...


4

The point of short-selling as a separate instrument is that you can you do it when you can't sell the underlying asset... usually because you don't actually own any of it and in fact believe that it will go down. Shorting allows you to profit from a falling price. Another (non-speculative) possibility is that you don't have the underlying asset right now (...


4

The math is not correct. Your option prices are off by a factor of 100. Option contracts typically represent 100 underlying shares, but the prices quoted are per underlying share. In purchasing an options position, you need to multiply the quoted price by 100, and also by the number of contracts desired. If you re-do your calculations, you'll find the ...


4

Check the rules with your broker. Usually if it expires in the money, the broker would exercise it. But you need to check with your broker about their rules on the matter.


4

A straddle is an options strategy in which one "buys" or "sells" options of the same series (same expiration and same strike price). The "buyer" or "seller" profits based on how much the price of the underlying security moves, regardless of the direction of price movement. IE: A long straddle would be: You buy a call and a put of the same series (same ...


4

A bullish (or 'long') call spread is actually two separate option trades. The A/B notation is, respectively, the strike price of each trade. The first 'leg' of the strategy, corresponding to B, is the sale of a call option at a strike price of B (in this case $165). The proceeds from this sale, after transaction costs, are generally used to offset the ...


4

The SPDR® S&P 500 ETF Trust (symbol SPY) seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500 Index. https://us.spdrs.com/en/etf/spdr-sp-500-etf-SPY Options are available on the SPY: http://www.optionistics.com/quotes/stock-option-chains The call's premium will ...


4

You bought an out of the money put, meaning that if the stock had stayed at $215, your put would be worthless at expiry. (why exercise and sell the stock for $195 when you can sell it for $215 on the open market?) So the intrinsic value of the option at this point is zero. The rest of the value of the option indicates that there is some probability that the ...


3

If you write an option, assignment means that you need to buy or sell the underlying security at the option contract price. In futures markets, physical delivery means you actually need to take delivery of the commodity. So unless you are a producer or manufacturer (like an airline who needs barrels of jet fuel, or meat packer who needs a few tons of lean ...


3

Naked put This is the same thing as an "uncovered put" You are the writer of the put (seller) and do not have a short position in the stock-- this means that if the buyer of the put uses the option, you would be forced to buy the underlying stock at the exercise price. There is huge downside and limited upside to this. (upside is the premium paid for the ...


3

On expiry, with the underlying share price at $46, we have : the $45 call has an intrinsic value $1 which equates to $100 = 100 x $1.00 the $40 call has an intrinsic value $6 which equates to $600 = 100 x $6.00 You ask : How come they substract 600-100. Why ? Because you have sold the $45 call to open you position, you must now buy it back to close ...


3

"Covered calls", that is where the writer owns the underlying security, aren't the only type of calls one can write. Writing "uncovered calls," wherein one does NOT own the underlying, are a way to profit from a price drop. For example, write the call for a $5 premium, then when the underlying price drops, buy it back for $4, and pocket the $1 profit.


3

I have an example of a trade I made some time ago. Stock price - $7.10 $7.50 call option 16 months out $2. By entering the position as a covered call, I was out of pocket $5.10, and if the stock traded flat, i.e. closed at the same $7.10 16 months hence, I was up 39% or nearly 30%/yr. As compared to the stock holder, if the stock fell 28%, I'd still ...


3

It is very rarely optimal to exercise an American option before expiry. Even if the stock goes close to 0, the market value of the options would likely still be slightly higher than the intrinsic value, so it would not be optimal to exercise since you could sell it for more than the exercise payoff. All that to say that the payoff at expiration would be the ...


3

Actually you can't lose more than what the diagram shows, even with American options, and these diagrams apply to both types. If the underlying stock gets to let's say $35 before expiration and your short $40 put gets assigned early (so you get 100 shares of stock from the put holder for cash outflow of $4,000), you still can't lose more than $400, because ...


3

If Apple is trading at $200 and you sell a Call with a strike price of $400, the contract would be way out of the money and worth maybe a penny per share. The person is buying the right to buy 100 shares of Apple for $400 per share which is of no value when the share price is $200. Same is true to sell the way out of the money Put. The person is buying ...


3

Let's look at the three payoff zones: If the stock goes above $55, then you have to sell it to the call holder for $45 for a gain of $1 ($5 loss on the stock + $6 gain in premium). If the stock is between $55 and $45, then you have to sell it to the call holder for $45 for a net gain of $1, but you also have to buy it from the put holder for $55, for a net ...


3

What if no one is selling $200, Dec 21, $FB calls. Everyone has a price - the bid/ask spread might be very wide but if there is an ask then someone is willing to sell. If you put in a market order, then you will be matched up with the current low ask price. If you put in a limit buy order, then your limit will be the bid and you'll be matched up with the ...


3

This is basic binary tree modelling which works for puts and calls. What you don't show is how to get Cu and Cd - the price of the call in the "up" and "down" underlying price cases. If you know how calls work and how to evaluate those, you can do roughly the same for puts (hint: for calls, the payoff value is MAX(0, S-K), for puts, the value is MAX(0, K-S)) ...


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