why do people buy outright and hedge with puts (kinda like a synthetic call) instead of just buying calls?
i've hedged with puts before earnings, i want to be long the stock (long term) short term, i thought market would punish the underlying. I don't know about others though...
exactly... that's what I did personally. But i'm following the stock, fundamentally. So it was my opinion, though long term I want to hold this stock, that short term the conference call would generate some news that the market would react to unfavourably. If the underlying stayed flat, I would just sell the put and lose on commissions and b/a spread If it rallied, well then I didn't make anything, I had to take that risk. If it fell, then I sell the put for a profit, thereby reducing my cost for the underlying. Book value still shows up as my original price I paid, and the "protection" shows up in the cash balance. What I wanted was the flexibility to evaluate if I still wanted to invest in this company post earnings w/out placing a stop loss. I wouldn't do it for every stock I have, I just had a strong opinion about this particular case.
ok, but say if it was a stock which had no volatile news coming out soon, and my trade was maybe only lasting a week, would it make sense for me to go long by buying calls?
maybe someone with more experience can shed some light. some members here prefer to trade direction with the underlying, others will use options it depends how much you're willing to risk, and how you protect yourself if it goes the other way. There is no right answer. if you're expecting large move upward then OTM calls can work. If it's a smaller move, ATM or ITM calls can work. you can also trade "bull call spreads" (long call vertical) it's hard to say "you should buy calls", since there are other risks with owning options than just the stock. edit: if you like the risk profile of a call, then call over stock+put makes sense for short term trade IMO.
erm, is there any books or something to learn options from the start? i think they could be really really useful swing trading stocks and realised they are much more complex than i thought. thanks for the info though
I'm happy you asked... There is a member here that wrote a book for rookies, his name is Mark. I personally have not read it, so others who have are free to comment on it. The Rookie's Guide to Options: The Beginner's Handbook of Trading Equity Options by Mark D. Wolfinger I personally started with Options Made Easy: Your Guide to Profitable Trading by Guy Cohen and found it very helpful. There's also lots of free information on the net -Options Industry Council -CBOE -Interactive Brokers has some lessons good luck!
Tax considerations? If the plan is to hold the outright for an extended amount of time and qualify for long-term cap gains... Just a thought.
yeh guy cohen's book has been on my list and its pretty dirt cheap at the moment, does he explain time decay, the greeks,implied volatlity etc?