Episode #125 of the Stack Overflow podcast is here. We talk Tilde Club and mechanical keyboards. Listen now
23

Short sales have a lower direct cost (i.e., the price of the put option), and so also a higher potential profit, but a much higher risk. Unhedged short sales are incredibly risky, of course, but they're typically hedged in one fashion or another. Put options are fairly expensive, so they won't necessarily be profitable unless the stock depreciates ...


13

In the early 90's, the SEC issued a ruling that allowed companies to sell puts on their stock for the purpose of buybacks. The short puts don't necessarily assure the company that they will acquire shares because if share price rises, the puts will expire worthless, generating some income, and the buyback isn't accomplished. OTOH, if share price falls, ...


11

No. In good years, the income seems free. In a down year, particularly a bad one, the investor will be subject to large losses that will prove the strategy a bad one. On the other hand, one often hears of the strategy of selling puts on stock you would like to own. If the stock rises, you keep the premium, if it drops, you own it at a bit of a discount ...


10

Options have legitimate uses as a way of hedging a bet, but in the hands of anyone but an expert they're gambling, not investing. They are EXTREMELY volatile compared to normal stocks, and are one of the best ways to lose your shirt in the stock market yet invented. How options actually work is that you're negotiating a promise that, at some future date or ...


10

Here is a quick and dirty explanation of options. In a nutshell, you pay a certain amount to buy a contract that gives you the right, but not the obligation, to buy or sell a stock at a predetermined price at some date in the future. They come in a few flavors: Call Option - You can buy a stock at a predetermined price (higher than the current price) ...


10

In theory, no. In practise, occasionally. In theory if the market is working correctly the price of a matched put and call in the same stock should align such that there is no profit in buying both. The same goes for any other set of options which are trying to cover all possible outcomes (or indeed for trying to bet on all the runners in a horse race!). ...


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 ...


9

Many web sites state that "90% of options expire worthless." That is categorically FALSE. The majority of options do not expire worthless. As per stats provided by the CBOE: 1) About 10% of options are exercised (gain or loss) 2) About 60% are closed before expiration 3) About 30% expire worthless 90% of options go unexercised which is very different ...


8

Standard options are contracts for 100 shares. If the option is for $0.75/share and you are buying the contract for 100 shares the price would be $75 plus commission. Some brokers have mini options available which is a contract for 10 shares. I don't know if all brokers offer this option and it is not available on all stocks. The difference between the 1 ...


7

Bull means the investor is betting on a rising market. Puts are a type of stock option where the seller of a put option promises to buy 100 shares of stock from the buyer of the put option at a pre-agreed price called the strike price on any day before expiration day. The buyer of the put option does not have to sell (it is optional, thats why it is called ...


7

Your price for the put is unrealistic. If the stock is at $18, and the put has a strike of $19, then the put is worth at least $1, since otherwise one could buy the put and the underlying stock, and immediately exercise the put (assuming it is American, as is usual for stocks), to get a guaranteed profit. This is called "arbitrage". Any such opportunities ...


7

This is a really bad idea. You are asking to be forced to pay for something at a time when you most likely NOT want to buy it. Why? There is no stability (much less any degree of predictability) to give up the right to control when and for how much you would be willing to own the S&P500. Just don't do it....."generate stable income" and "selling puts" is ...


7

Yes, it's completely normal to buy (and sell) puts and other options without holding the underlying. However, every (US) brokerage I know of only permits this within a margin account. I don't know why...probably a legal reason. You don't actually have to use the margin in a margin account. If you want to trade options, though, you will need a margin ...


6

Options reflect expectations about the underlying asset, and options are commonly priced using the Black-Scholes model: N(d1) and N(d2) are probability functions, S is the spot (current) price of the asset, K is the strike price, r is the risk free rate, and T-t represents time to maturity. Without getting into the mathematics, it suffices to say that ...


6

Yes, the potential loss for a short seller of stock is almost unbounded but no stock has ever gone to infinity. Anyone with any experience with shorting would practice disciplined risk management should a short position move against him. Yes, a gap can hurt but no trader with a lick of sense doesn't cut losses. As for long puts versus short stock, ...


5

The question is, how do I exit? I can't really sell the puts because there isn't enough open interest in them now that they are so far out of the money. I have about $150K of funds outside of this position that I could use, but I'm confused by the rules of exercising a put. Do I have to start shorting the stock? You certainly don't want to give ...


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 ...


4

The key difference between American and European options relates to when the options can be exercised: A European option may be exercised only at the expiry date of the option, i.e. at a single pre-defined point in time. An American option on the other hand may be exercised at any time before the expiry date. This is why American options are in general ...


4

Options are an indication what a particular segment of the market (those who deal a lot in options) think will happen. (and just because people think that, doesn't mean it will) Bearing in mind however that people writing covered-calls may due so simply as part of a strategy to mitigate downside risk at the expense of limiting upside potential. 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

There is no standard answer to this question. It will depend entirely on what kind of options activities your broker offers and what your broker has approved your specific account for. Consider: Most brokerage accounts, by default, don't permit options trading at all. You typically need to ask/apply for it. Even with options trading, many brokers, by ...


4

If you are planning to hedge your stocks by buying, say, a put on the SPY, it's an expensive way to go. SPY is 208 right now, and the Jan16 (five months out) put is $8.20 or 4% of the value. i.e. you'd need more than a 4% drop to just break even. If you fear a 20% sized crash, 40 points or so, a $190 strike is at $3.37. And at SPY $168, you'd have $22 in ...


4

In the money puts and calls are subject to automatic execution at expiration. Each broker has its own rules and process for this. For example, I am long a put. The strike is $100. The stock trades at the close, that final friday for $90. I am out to lunch that day. Figuratively, of course. I wake up Saturday and am short 100 shares. I can only be short in ...


4

Whether or not you make money here depends on whether you are buying or selling the option when you open your position. You certainly would not make money in the scenario where you are buying options at the open. If fact you would end up losing quite a lot of money. You do not specify whether you are buying or selling the options, so let's assume that you ...


4

Yes, if there is liquidity you can sell your option to someone else as a profit. This is what the majority of option trading volume is used for: speculative trading with leverage.


4

However, doesn't the sellers obligation to fullfill the put/call option still remain? No. Buying to close effectively transfers the obligation to buy or sell the underlying stock to the party that sells you the option, so you are, for all intents and proposes, out of the contract. The clearing house cancels out your position and you have no exposure ...


4

If the company is acquired for cash, the expiration of the options expiring after the acquisition date will be accelerated to the acquisition date. Since your proposed scenario involves $20 per share, your short $10 puts will expire worthless and you will keep the premium. However, if the acquisition is for shares only or for cash and shares in the ...


4

A call is out-of-the-money (OTM) if the strike price is higher than the market price of the underlying. A put is out-of-the-money if the strike price is lower than the market price of the underlying. If an option is OTM, all of its premium is time premium. Your put has a strike price below $74 so all of it is time value.


4

OTM protective puts are like a traditional insurance policy. You have a cost and you have a deductible. In the case of puts, the deductible is the underlying's current value less the strike price. The total of the two is your potential loss at expiration. ATM hedging one year out with SPY puts costs about 6%, more if you use earlier expiries. Hedging ...


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