Very few have responded to the 2nd half of your question. Put protected stock will lose, period. That position is equivalent to owning a long call and long calls lose as the underlying drops. The maximum loss will be apporximately the cost of the put plus the distance down to strike. How much less the loss is will depend on how far ITM the UL is, how much time remains until expiration and IV change, if any. Since you have several variables, a pricing model is necessary to get an almost accurate answer. I say almost because future IV is unknown. You might want to consider other strategies for protecting yourself. The best one is to get out of the way (sell the UL). Alternatively, a collar is one way to reduce the cost of the protection. Over selling calls (or bearish call spreads) above is a better hedge but introduces upside risk. Pick your poison
A valid point but a bad example. Hedging with longer term options costs a lot less. IMO, using an option that close to exp is only for someone trading in a similar time frame and adoitly, at that.
How is that equivalent to owning a long call? The long call chart looks like this: _/ Yes, it loses as the underlying drops. But a long put chart looks like this: \_ Doesn't it gain as the underlying drops? From looking at the option charts, I don't think I'd ever be interested in selling options. Too much unlimited downside. I know people make a lot of money doing so, but the stock market usually goes against me so if I sold a call the market would probably go straight up the next day.
Cannot disagree. If you plan on even looking at options buy a basic book and learn. You should at least read this - http://www.amazon.com/Options-Strat...=sr_1_7?s=books&ie=UTF8&qid=1298994660&sr=1-7 He breaks it down really in laymans terms.
Correct, a long put is different than a long call. However, I compared put protected stock with a long call (they're equivalent) which is what you asked about in your original post. Apples and oranges. I suggested other ways (not necessarily better) ) to reduce the cost of hedging and to reduce the maximum loss should the underlying collapse (what you asked about in your original post). That has nothing to do with selling naked options per se. You're reading A and replying as if it were B. We can't help you with that. But if it's merely a lack of option knowledge, take Crispy's good intentioned and appropriate advice and read McMillan's book.