can you liquidate your position in option of a stock easily ie like stocks or are they hard to unload? furthermoe, what does it mean by open interest and how would one trade options? im very new to options and i would appreciate any help
i basically need an example.... for example lets say i have 200 shares in BBY at 48.10 ... now i want to hedge this position by buying puts for jan 2008 contracts. Which contract could i buy and what would it mean for me money wise if the stock goes up to 52 or 44. your help would be appreciated thanks
1) can you liquidate your position in option of a stock easily ie like stocks or are they hard to unload? If the current bid is acceptable, your contracts will sell immediately. 2) furthermoe, what does it mean by open interest? Open interest represents the number of contracts in existence 3) and how would one trade options? im very new to options and i would appreciate any help That $64 question is answered by reading as much as you can and learning about them.
If you want an answer for a move prior to expiration, you'll have to either provide a specific date, strike price and premium or learn how to use an option pricing model. On an expiration basis, for an out of the money put, the risk would be the cost of the put plus the distance to strike. The gain would be the stock appreciation less the cost of the put.
It depends on the stock. BBY options are pretty liquid, and the bid-ask spreads on the Jan 08 puts are only 20 cents wide and have hundreds of contracts at the bid and ask. If you're looking to hedge 200 shares of a stock, you're only talking about buying 2 to 4 put contracts, so there's no problem with liquidity there. The Jan 08 $47.50 put is currently quoted at $3.40/$3.60. The multiplier is 100, so you could buy one contract for $3.60, which would cost you $360 plus commission. You could also bid $3.50 for it and see if anybody wants to give you that price. As a holder of the put, you have the right to sell 100 shares of BBY at $47.50 any time between now and Jan 18, 2008. You can also sell the put to some other buyer and not touch your stock at all. Right now you can sell it for $3.40. If BBY goes down in price, the value of the put will increase, if it goes up, the value of the put will decrease. As BBY's earnings date approaches, both the puts and calls will get more expensive regardless of the way the price of BBY moves (this is due to Implied Volatility going up). Finally, the value of the put will also decrease over time. My options calculator says that if BBY is still at $48 one month from now, that put will be worth only around $3.25. In 2 months, if BBY is still at $48, the option will be worth only $2.97. By the end of the year, if BBY is still $48, the put option will be worth $.98. If BBY is above $47.50 on Jan 18, 2008, the put option will be worthless. But, if BBY decreases to $44 in the next month, that put will be worth $5.17. If BBY increases to $52 in a month, that put may be worth only $1.91. You may have noticed that options change in value more slowly than the underlying stock. So for every 100 shares of BBY you own, a $4 drop will mean you'll lose $400, but that put option you paid $360 for will have only gone up by $100 or $150. Another way to preserve your investment is to sell covered calls. Right now you can sell a BBY Jan 08 $50 call for $3.50, or $350 for each contract Selling that covered call means you're willing to sell someone 100 shares of BBY for $50 any time they wish between now and Jan 18 2008, regardless of BBY's price at the time. If BBY stays below $50 through January, you'll get to keep that $350 without having to sell your stock. If BBY goes to $58 like it was last October, someone who bought that call from you gets to buy the stock from you for $50. (If BBY does go to $58, you can also buy that call back from someone if you want to keep the stock, but it'll probably cost you $9 , i.e. $900, or more). If you're new to options, you should definitely take some of the online courses at cboe.com or 888options.com, or talk to your broker, before making any trades. There's no reason to put your money at risk unless you're fairly confident in what the consequences are.
thank you very much loufah your help was greatly appreciated!!!! a very thorough answer again thanks i think i'm going to practice for a few months before i come into this game