Question about options

[silviaic]

Hi,

I'm trying to understand something about options that I think it would be better answered by someone here. (I don't want to go a read a load of stuff just to find out that it is not what I thought it was). I trade stocks on margin and I want to have a "guaranteed" stop loss. So the first thing I thought was: ok, I short the share and I buy a call. Now, my question is: what is the difference between this and buying a put?

Thanks a lot,

Silvia.

 

[Profitaker]

ok, I short the share and I buy a call. Now, my question is: what is the difference between this and buying a put?

There is no difference. In the same way that buying the stock and Selling a Call is exactly the same as shorting a Put.

Puts, Calls and the underlying asset must always conform to a relationship of no arbitrage called "Put - Call Partity".

Calls = Puts + Stock - Strike
Puts = Calls - Stock + Strike

Any difference will be spotted quickly and zapped by trading a conversion or reversal.

 

[anley]

Sure, you can always have a guranteed stop loss but the cost of the guarantee won't come cheap, in fact it WILL eat all of your profits (if you generate any, and add significantly to any losses).

You can't have it both ways, unlimited upside and a fixed downside without paying for it.

But wait, you can have this with a long call, sure but again you're paying for it by holding a wasting asset. So whichever way you look at the equation there's no way to beat it (sort of like the roulette wheel), , insurance always costs.

Whether or not the options help is a different question but in the meantime realise that paying away the options bid-offer spread all the time means one thing - forget about options FOR EVER.

If you don't like the risk associated with trading on margin then don't use it.

Don't mean to sound harsh by the way.

 

[silviaic]

Sure, you can always have a guranteed stop loss but the cost of the guarantee won't come cheap, in fact it WILL eat all of your profits (if you generate any, and add significantly to any losses).

You can't have it both ways, unlimited upside and a fixed downside without paying for it.

But wait, you can have this with a long call, sure but again you're paying for it by holding a wasting asset. So whichever way you look at the equation there's no way to beat it (sort of like the roulette wheel), , insurance always costs.

Whether or not the options help is a different question but in the meantime realise that paying away the options bid-offer spread all the time means one thing - forget about options FOR EVER.

If you don't like the risk associated with trading on margin then don't use it.

Don't mean to sound harsh by the way.

Thanks for the reply guys. ProfitTaker: then it's going to be worth reading, cheers

Anley: As far as I understand it options are instruments created to hedge. So people like me, 'who don't like the risk associated with trading on margin and then don't use it ' can buy an insurance policy in their positions. I never suggested I thought they were giving options for free, duh. Wouldn't that be grrreat?

I'll be posting lots of questions then :cheesy:

Thanks again guys,

Silvia

 

[flyingeagle]

Options are great

make sure that
1. you have volitility on your side,
2. if you buy ( whether a call or put) you give yourself enough time to be correct.
3. if they become worthless during the time available leave them as it will cost you more
to close it through your broker, and they might even come back in profit.
4. you trade those companies that have a lot of liquidity. and that the particular option
is liquid.

check out www.optionetics.com for learning and www.thinkorswim.com for trading
and www.snowgold.com for an options calculator.

happy trading

 

[silviaic]

Options are great

make sure that
1. you have volitility on your side,
2. if you buy ( whether a call or put) you give yourself enough time to be correct.
3. if they become worthless during the time available leave them as it will cost you more
to close it through your broker, and they might even come back in profit.
4. you trade those companies that have a lot of liquidity. and that the particular option
is liquid.

check out www.optionetics.com for learning and www.thinkorswim.com for trading
and www.snowgold.com for an options calculator.

happy trading

Thanks for the links flyingeagle, very useful, in particual thinkorswim. The more I read about options, the more interested I get. Funny how they sounded boring to me before, and now I'm starting to find them a really interesting subject!

Silvia.

 

[Profitaker]

Funny how they sounded boring to me before, and now I'm starting to find them a really interesting subject!

Yes, they are fascinating and complicated. There are so many things you can do with them - where else can you profit if the underlying is stationary, for example.

Or how else could you run a highly leverage directional play at no cost. Serious risk(s) involved too, but fascinating, and well worth sutdying IMHO.