I am new to options trading and wanted to know the best way to hedge some equity positions I sometimes find myself taking overnight. If I am long 10,000 shares of GPN at 40.05, and was looking to limit my downside risk, what is the best method? I'm looking to create some sort of safety net for the 1-3 days I will be holding the equity position. I think I need to write some call options, but can somebody explain the process. Also, how much will the entire transaction cost. What are implications if the stock goes down $5 or up $5? Thanks for the help.
ok, I shouldn't tease you. There are many ways to handle this. You can buy a put... or form a collar.
From the CBOE site, I got the following quotes for GPN Options: Code: Calls Last Sale Net Bid Ask Vol Open Int Puts Last Sale Net Bid Ask Vol Open Int 07 Jan 35.00 (GPN AG-E) 3.70 -0.20 3.40 3.70 3 170 07 Jan 35.00 (GPN MG-E) 0.05 pc 0 0.10 0 10 07 Jan 40.00 (GPN AH-E) 0.15 -0.15 0 0.15 1 525 07 Jan 40.00 (GPN MH-E) 1.55 -- 1.45 1.55 120 524 07 Jan 45.00 (GPN AI-E) 0.05 pc 0 0.05 0 1086 07 Jan 45.00 (GPN MI-E) 6.30 pc 6.30 6.70 0 245 07 Feb 35.00 (GPN BG-E) 4.50 pc 3.80 4.10 0 168 07 Feb 35.00 (GPN NG-E) 0.30 pc 0.20 0.35 0 109 07 Feb 40.00 (GPN BH-E) 1.10 +0.20 0.85 1.00 225 1077 07 Feb 40.00 (GPN NH-E) 2.10 +0.10 2.10 2.30 36 714 07 Feb 45.00 (GPN BI-E) 0.25 +0.05 0.15 0.25 1 2425 07 Feb 45.00 (GPN NI-E) 6.10 +0.60 6.30 6.70 1 326 You can sell the Feb 45 calls for 0.15 and buy the Feb 35 puts for 0.35. Your net cost, without commissions will be 0.20. You will lose about $6 (if GPN closes below $35) and make about $4 if it closes above $45. Or you can just buy the Feb 35 puts as an insurance policy. Does this help?
Assuming that you're dealing with OTM options: 1) If you sell calls (a covered call), your downside protection is the amount of premium received. Your max. profit is the strike written plus the premium received less the stock's cost. 2) If you buy puts (put protected stock), your risk is the distance from the stock down to the put strike plus the premium paid for the puts. Profit is unlimited (whatever the stock can rise to) less the cost of the puts. 3) If you do both of the above (a collar), you are funding the cost of the puts by selling the calls. You then have a floor (safety net) and a ceiling (maximum profit). Other than the level of approved trading your broker has approved you for, there's nothing to prevent you from trading any of the legs of these positions. Good luck!