So, I've been on this site for a long time, and there's always the guy who's like you've been on this site for so long and you don't know this stuff? Nope. Because I've spent maybe 1% of my time learning about options. Look, I've been reading more about options, and I have some questions. First, it seems like a lot of people make money writing options. The payoff chart for a lot of these basically seems like, if price stays at or above a certain price, you make a little money, and if price goes below it, you lose potentially a lot of money. Yet this is peddled as a strategy. What am I missing? Is this a lot of small wins and few big losses? If you're so confident price will stay above a certain price, why not buy a call or stock? Second, let's say a stock is at 100 and you think it's going to fall. You could short it, but you'd rather buy puts. Is there a reason and/or name for doing it like this: Buy 1 95 put Buy 1 90 put Buy 1 85 put etc. edit - let me clarify: instead of buying one put at like 95, you are buying many puts at different prices, each lower than the other. So if price falls, some/all of them may give money. So if price drops a bit, you make a little, and if it drops a lot, you make heaps? Third, I found a video where a guy was talking about buying puts to hedge your risk. For example, he said if you bought a stock at 100 and it went up to 200, and then you were worried it might fall, so you might buy a 150 put. Ok, this makes sense. But. If you think it's going to fall, why wouldn't you just sell some of your shares rather than buy a put? You're going to lose less if it falls, and you're going to make less if it rises. Forth, my broker is TDAmeritrade. I have seen some fancy option charts places with lines and stuff that show you how much you'll generate. My broker doesn't do this. Can you recommend someone who does? Finally, are there websites that will do this? I found https://www.optionsprofitcalculator.com/ which sort of does what I'm asking but not really. Appreciation!
I would only buy the 95 put - If you are right about direction that's were you will make the most amount of money.
Re: 1 This is no different than selling car insurance or health insurance. It’s an insurance business. They do make money most of the time, but can lose big. In the end the performance isn’t actually different than holding shares and not trading options at all. Re: 2 I’m not aware of reasons to do so. A single put or puts at the same strike should be sufficient. But you have to be careful about IV (implied volatility) because at high IV you can overpay for puts and not make money even if the stock price falls below that strike. Puts are cheapest during nice steady market when no one expect the market (or specific stock) to fall. Re: 3 You can find videos and “guys” talking about everything imaginable. If they knew how to trade they wouldn’t have time or reason to make videos on how to make you rich. Re: 4 TDA’s ToS (ThinkOrSwim) software is the best for exactly the thing you’re asking. I use ToS only to view option profitability/risk charts, while trading options at another broker. All professional option trading teachers/videos use ToS to demonstrate how option pricing will behave, by date, volatility, specific price movement, etc. You can find instructions on YouTube, or play under “Analyze” tab, “Risk Profile” feature.
From a buying power and leverage stand point buying the put is defined risk. The most you can lose is the premium you paid. Short selling the stock has unlimited risk to the upside. Can be managed of course with stops etc.
So is that safer then? And couldn't you buy more of them for the same price? I'm just making these numbers up, but say a 95 call is 10, an 85 call is is 8.50, so you could pay 1000 for 10 95 calls, or 1000 for 11 85 calls, so if price drops to 80, which would be wroth more?