Option newbie - Help

Just trying to figure out how put options work with hedging. Please tell me if this is correct, and maybe correct me along the way


Lets say I buy 100 shares of XXX stock at 10.00 a share. I expect It will rise in price, but I also want to make sure I minimize my risk. So, I purchase a put option. Now, with the put option I would buy 1 contract right? 1 put option contract = 100 shares of the underlying stock right?

So, I pay the premium of whatever it would be....

Now, lets say my stock did in fact go up...I would not exercise my put option correct? Just pay the premium?

Now, if the stock did drop downwards to lets say 5.00 a share, my 1 contract of the put option would of gone up to off set the loss correct?

Thank you for any help you can provide!
-Kastro

 

Yes, you buy 1 contract. If the stock goes up you lose just the premium. If the stock falls then at expiry you have a gain of 5 less premium on puts, which offsets the loss of 5 on the stock (not fully, obviously).

 

Great, thank you!

Can you by any chance explain to me a covered call option strategy?

Any help would be great. Thanks again,
-Kastro

 

...with a put option, your upside is unlimited and the downside is limited..& covered call is selling Calls, as opposed to buying puts or calls. You are the one writing the option.

 

well it's more complicated than this: if you buy 100 shares and buy the put at the same time you might as well buy a call in the first place. it's called put-call parity.
as for a covered call that's buying 100 shares and selling 1 call, but again if you do this at the same time, you might as well sell 1 put; it's the same.

 

Great information...Thank you!

This may sound stupid, but selling a put is selling a contract that I write correct? I am selling a put contract that I expect it will go down?

Thanks again guys!

 

do the work bro---


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Hey ok, So whats the point of a forum?

Thanks to everyone else, I'll shut up now because I seem to be clogging up the board with all my questions.
-Kastro

 

You are absolutely correct. If one considers buying a stock and at the same time buying a put to protect it then he/she should just buy a call as it is the same thing.

On the other hand, if the stock position already exists (i.e. long term investment) then buying a put makes sense.

Using the same logic, buying a stock and selling a call at the same time, i.e. covered call (aka covered write), doesn't makes sense as you can just sell a put and achieve the same position with less commissions and slippage.

 

kastro:

yes, the forum is for asking questions. don't ever feel silly asking "stupid" questions, because we all started at the same place - square one.

there is nothing wrong when someone refers you to the library or bookstore, I am sure iceman is saying it from the bottom of his heart. Topics on writing covered puts and calls are ususally covered in basic investment texts. Since you are interested in these strategies, might as well go get a book and learn the operation from a dependable source.

are these good investment strategies? Please DON'T get them started... ;-)>

the forum is a good starting point, I hope we have got you interested to pursuit further.