For those who sell option, how do you guys deal with option that goes against you? Is buying back the option losing 15x the only way to deal with such situation? Stock option is america style so does a seller possible to hold on to option which move from out of money to in the money or once in the money the seller is force to exercise?
1) There is no reason to hold a short positon for a long time. Waiting until it is worth 15x as much as when you sold it - that's the wrong thing to do. Losses should never be that big 2) You can buy it back when the loss is much smaller 3) The seller is never forced to exercise. The seller cannot exercise. Only the buyer can exercise. But, the seller not not have to hold the short option position until he/she receives a notice that the owner owner has exercised. You can buy iut back any time you want to do so. Mark
Hi Mark, The option is possible to buy back to limit lose but in practice this is not that realistic. You would not know if when the stk price move against the option or turn around. If the option is brought back to limit lose and than the stk price turn around and move profitably and at expiration is out of money than the brought back is wrong
With all due respect, this is precisely the thinking that gets most people in trouble with short options, in fact, not just with options, with trading in general. You first goal should be to live another day, hence taking a loss early is just good risk management. Sure, the stock may reverse after you have taken a loss, but so what, it could just as easily keep going against you and wipe you out. Even if the option ultimately expires OTM, buying it back at a manageable loss is NOT wrong! Unfortunately, we, humans, are preprogrammed for thinking and doing exactly as you describe, so the goal in trading should be to override that!
Hmmm, now where else have I seen a perfectly fluent poster suddenly talk like a poor factory worker? Doos this ring a bell to anyone?
MTE has it right. You never know if the trade you make will be a winner. Survive first, then worry about profits. Mark
This bring another questions when should the option be brought back that is how much stk price move against the position to consider buying back the option a worthwhile try to limit loses. Another thing option seems to be a losing games. If you sell options the position possible to wipe out the account with a more than usual lose. If you buy option, there is a big spread + losing premium + adjust for delta and many more etc...