Comments (38)

Peter

January 2nd, 2012 at 4:41pm

Hi Shawn, that's seems fine to me - that is the power of leverage and the main reason retail traders use options. But, you can also lose those amounts (or your entire premium) if the market goes against you.

Shawn

December 30th, 2011 at 12:54am

I just got finished using the P/L Calculator on optionshouse paper trading and tried a couple different combinations, one in particular that i would appreciate some insight on. XYZ is trading at $40, and purchasing 3-$39 calls @$1.12 and a 3-$41 puts@1.56. From 40 to 41.36 its a loss(max $36), looking at the monthly chart the stock has moved in a $2.50-$4 range for the entire ytd. $804 total investment; $2-$4 down returns $300-850; $2 up returns $100-$650. The problem here is it seems to good to be true. Am I misinterpreting something OR does that sound about right?

Bev

November 10th, 2011 at 1:56am

Thanks for shedding MUCH needed light on that and guidance to other means to close a position.

Peter

November 2nd, 2011 at 4:55pm

Hi Bev,

Sure, you can wait until the expiration date and exercise the option but this will require capital to take on the position. However, you won't have any trouble getting out of the position if you really want to.

The option market makers will always be there to take the other side of your order. If there isn't a bid ask market there you can perform a "quote request" (if the market and platform supports it) where market makers will respond with a double sided quote.

If not, then you can place an order yourself and adjust it until someone takes it. Once the order is priced above the option's intrinsic value you will definitely get hit on it.

Bev

October 31st, 2011 at 5:26pm

I have bought long put contracts on a stock currently selling for 8 dollars. It is expected to easily move down to 6 dollars or less. I bought 40 contracts at 1.00 (100 dollars a contract) and the current open interest including mine is now 119 contracts. Not a lot of volume in other words. For such inexpensive stocks (and currently low open interest) is there a point you had best sell? In other words, say I held the option until it went down to 4 dollars. Who would buy this now expensive put option from me for say 3 dollars when they can just short the stock itself for 4 dollars?
Or can I hold it until it would reach the 4 dollar mark and then exercise it? Using an online trading platform, how do you actually exercise it? I have only closed the option contracts in the past so not sure how that works?
Great site by the way - most appreciated.

MAHENDRA KUMAR

October 28th, 2011 at 11:30pm

Buying put is the opposite of buying a call. When you buy a call option you are bullish about the stock/index. When an investor is bearish he can buy a put option. A put option gives the buyer of the put option a right to sell the stock (to the put seller) at a pre-specified price and thereby limit his risk.

Peter

October 19th, 2011 at 4:18am

No, that's the advantage with buying options - your maximum loss can only be the premium paid when you bought the option.

Dave

October 18th, 2011 at 7:12am

I purchased (BUY) a put option that is about to expire worthless. I wanted the price to drop when I bought the put, and it didn't it went higher... I do not own the underlying stock. Is there any more risk of loss if this position expires other than the cost of the initial trade?

Peter

September 29th, 2011 at 5:48pm

If the option is American Style then it can happen either at expiration or when the buyer of the option chooses to exercise.

If the option is European it only happens at expiration.

Applebox

September 29th, 2011 at 1:00pm

Question on selling puts...

Am I put shares when the strike price is met automatically? Or does this only happen at expiration?

Thanks!

Bob

September 9th, 2011 at 10:25am

Great info Peter, thank you.

Also, I had another put of mine on my mind when I wrote that last post. But the put I was referencing to you is actually a two letter designation for a german bank, just so I haven't thoroughly confused you or anyone.

Thanks again!

Peter

September 7th, 2011 at 7:52pm

You can exit the trade whenever you like - not just when it hits the strike price. It depends on your view of the stock - if you think it will continue to trend lower, then hold onto it. Or maybe sell half of your position when it hits the strike and keep the rest open (if you have more than one contract on it that is).

Once the stock trades below the strike the delta (and hence your equivalent stock position) will start approaching -1 meaning that the lower the stock goes the more value your position will make or lose.

Bob

September 6th, 2011 at 12:18pm

Thanks Peter!

If it helps, I'm using rounded numbers for GS stock price, which was 36 Friday and now is trending down to 32 or so at market open today.
My put is for a strike of 30, which we're now getting pretty close to. So I can take good profits now as it's dropped from 40 to 32 on my 30JanP.
What happens to my put if I keep holding if the stock goes below my strike price of 30 (since I still have several months till expiration)? As the stock price goes below my strike of 30, does that mean I keep making more profit as there is still someone on the other side of the trade (now buying a call up to 30)? Or is it best to get out once I reach the strike price?

Thanks again!

Peter

September 5th, 2011 at 5:47pm

Hi Bob,

Hard to say exactly...it really depends on the market prices for those options at the those times. But I would say that a 25% OTM put option with 3 months to expiration (without knowing volatility of course) would be a very low priced option. At this point if my decision (again, without knowing the volatility) was to get out after a $5 move after one month or get out with 10 days to expire if the stock were to reach the strike, then I would take the later option for sure.

You can play around with these numbers yourself using my option pricing spreadsheet.

As you are the buyer of the option you have the ability to decide whether to exercise or not, so yes, you can hold onto the option as the stock price moves lower.

Bob

September 5th, 2011 at 12:39am

I'm new to options trading and have a basic question. If I'm using a long put, current price is $40, and I buy a put for a strike at $30 in three months:

1. is it better to sell in one month's time if the price only drops to $35 (take returns and get out profitable essentially), or better to wait for it to hit strike price of $30 closer to the three months' option time? (assuming belief is that it will indeed continue to drop)

2. can I hold if the price continues to travel lower than my $30 strike price limit or would I have been required to sell at the strike price of the option?

Peter

August 16th, 2011 at 7:27am

Sorry - I don't understand your question. Could you elaborate please?

hussain

August 16th, 2011 at 2:15am

How I can differentiate put and call option under long and short term?

Peter

December 8th, 2010 at 10:48am

It depends on what you're trying to achieve...are you talking about a call or a put?

kavitha

December 8th, 2010 at 3:22am

I am beginner of option trading so I need to one clarification
which strike I sell & buy the option ex: nifty current level 5865

pl explain with example

Peter

September 12th, 2010 at 10:03pm

The broker can't stop you exercising - it is up to the clearing corporation/exchange. In the US this is the OCC (Option Clearing Coporation).

Whether you are able to go "short" the stock can be up to both the broker (to manage client risk limits) and the regulators (US banning all short sales).

Stock borrow would not come into it because if you exercise your put you can just buy the stock in the open market at the going price and deliver it (sell) to the put option writer at the strike price (a stratch trade on the stock).

ken

July 14th, 2010 at 2:31pm

I have been trying to get this answer If you buy a put and the stock is hard to borrow will the broker prevent you from exercising? or will they automatically cover the position at the close? or do they let you exercise and commit a naked short?

Peter

July 7th, 2010 at 7:44am

Hi Raj, if you take a look at the payoff graph above for a put option it will show you how the price of the option changes when the stock price changes. A put option will gain value when the stock price declines, which is the opposite of a call option. A call option rises in value as the stock price inceases.

Raj

July 6th, 2010 at 11:39pm

Hi, I am beginner in the options trading. Need help in understanding the call and put. I assume the call and put price will go higher with price of stock coming a strike price. Taking a example of stock XXXX at strike price 440@11.30 put but trading at 500... As the stock price of XXXX come downd... put go higher... is this correct?.. please explain with an example

Peter

June 28th, 2010 at 6:53pm

Hi Hvete, it's not a stupid question at all...it's good that you asked.

The key to understanding options is that they carry the "right" to buy/sell an asset - not an obligation. If you have bought an option and do not wish to "exercise" it, then you simply allow the option to expire and all you lose is the premium paid.

This is why there is no mechanism to ensure that you hold the stock when you buy a put option. However, if you have bought a put option with a strike price of $25 and the stock is trading at $20 at expiration then why wouldn't you go and buy the stock and exercise your option for an immediate gain of $5 per contract? (some brokers will automatically borrow the stock for you if you exercise an option with collateral).

To answer your last question...the buyer of the option have the "right" to exercise but the sellers of the option are "obliged" to exercise. I.e. the sellers don't have the choice...if you decide to exercise and sell the stock, the seller of the option has to buy the stock from you. That is why the buyer pays the premium to the seller.

Hvete

June 27th, 2010 at 9:13pm

Additional stupid question. Suppose I have a put option that gives me the right to sell IBM stock at $40 a share (assuming we can get around the problem that I don't own any IBM stock). How can I have a right to sell if no one wants to buy, and surely no one will want to buy if IBM is trading at $35.

Hvete

June 27th, 2010 at 9:08pm

So here's the really stupid question. One thing I keep trying to get my head around is this. A put option gives me the right to sell a stock at a certain price. How can I have the right to sell a stock if I don't own it? So if I do own it, and every time you buy a put option, there's some mechanism to affirm that I own the underlying stock? If I own the stock, I can't see any terribly good reason to buy a put option. If I don't own the underlying stock, how can I sell what I don't own? So I read that I borrow the stock. Borrow the stock? Like I borrow your house and sell it? I can't borrow your house and sell it and then buy it back... at least not without your permission. So why does anyone grant permission to lend their stock so someone can play games with it? What's in it for the real owner of the stock?

Peter

June 21st, 2010 at 7:44pm

If the option specifications are set for physical delivery, then I guess it depends on your situation with your broker. They may borrow the stock on your behalf to on-sell to your counterparty who is short the put option.

If the option is cash settled (i.e. most index options) then no asset is transferred.

Also...if you are long an in-the-money put and you know that you don't have enough funds to cover the stock purchase, then you would just sell the option prior to the expiration date and realize the gain that way.

maria

June 14th, 2010 at 5:06pm

What will I receive if I exercise a long put and I have no assets?

Peter

November 7th, 2009 at 5:17am

Hi Vishal, other speculators who are still bearish on the stock, market makers, investors hedging their long stock or option traders who are buying puts as part of an option combination are examples of who would be buying the option from you.

vishal

November 1st, 2009 at 11:19pm

let us say i have put option and during bearish market i want to use my put option to earn profit, at that time who will purchase my costlier put option (even if i have right to sell) as the price movement is downwards. plz help

Peter

August 20th, 2009 at 9:11pm

It would only be 40/0 if you paid 0 for the option.

Stan

August 18th, 2009 at 8:06pm

You don't need negative stock prices for unlimited profit potential. When expressed as a percentage, if the underlying stock goes to zero, your gain is infinite. If the current value of the stock is 50, you buy a put with a 40 strike and it goes to zero, your gain on the option is 40/0, or infinite percent.

sarbjit

July 26th, 2009 at 3:37am

Dami,
yes, we can hedge a scrip to decresing in value through long put option.

Dylan

January 4th, 2009 at 12:45pm

The profit potential of a long put option is only unlimited if negative stock prices exist.

Admin

January 2nd, 2009 at 6:42am

Hi Yonis, not sure what you mean. Long refers to a purchase and Short a sale...not long and short term. Hope that helps.

yonis

December 24th, 2008 at 2:59am

how i can differentiate put and call option under long and short term?

Admin

September 25th, 2008 at 6:06pm

Yep, that's a strategy called a Protective Put. Please see the link under Bullish category.

Dami

September 24th, 2008 at 10:37pm

Don't we use long puts to protect a stock we currently own from decreasing in value.

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