Hooya said:what confuses me is why have puts and calls as you can sell/buy both but guess there will be explanations in the books I will have to read. Just looking on delayed prices on Liffe; an offer on June 4525 calls is 38 but 4425 is 80 odd you would rather buy the 4425 strike ??? and I assume the closer it gets to exercising date and further away from the strike price(in the money) the more expensive the options become?
oops FTSE on the move I'll stop waffling
thanks Bonsai also.
Hooya - although you can go short in 2 ways - i.e. by selling calls or buying puts, they are very different strategies. Selling calls "At The Money" will put premium into your account and you'll keep it under all circumstances, but you'll lose for every point that the index rises above the strike price, WITHOUT LIMIT. You can, of course hedge it - you don't just sit there like a frog in a pan of water on the stove - lol. If the index stagnates, then time decay is on your side and you get to keep the premium.
You can also go short by buying puts. Here your risk is limited to the premium paid for the put, and profit will rise as the index falls. But time decay is working against you, and if the index stagnates, or only falls slowly, then the value of the contract will fall and you'll lose.
You can of course do both - sell a call to pay to buy a put - creating a synthetic future.
