Protecting a short position with options

Discussion in 'Options' started by Paul Yeoh, Nov 27, 2010.

  1. Paul Yeoh

    Paul Yeoh

    Hi everyone

    I'm a newcomer in this forum. This is my very first thread. Here is a problem I have:

    I sell 100 shares of ABC Company short at $100. Also, I buy a 40 call option for $5 to protect against stock price going up
    1. If the stock ends up at $110, what will be my overall gain/loss?
    2. If the stock ends up at $50, what will be my overall gain/loss?
    3. What is the most I can lose under this short sale-call option plan?
    4. If I have an unprotected short sale position (no call option), what is the most I could lose?
    5. Under the conditions described in (4), if I have a limit order to buy the stock and close out the position at $54, what is the most I could lose?

    Kindly leave me your solution. Thanks a lot.
     
  2. why not just buy a put instead of all that work.
     
  3. You need to use better numbers - if the stock is at $100, it is impossible for the 40 call to only cost $500.

    If the stock is at $100, it would be more common to also buy a Call in the 100 strike range for protection, not a 40 call.

    JJacksET4
     
  4. You need to join me over on the FANTX (the Fantasy Exchange) where anything is possible :D
     
  5. tsaw

    tsaw


    Hi Paul,

    Let me help U by rephrasing your above into more realistic terms & nos.:

    Short Company at $100.

    Buy 110 calls Jan 2011 for $5 to protect your position.


    Then the answers to your questions will be:

    Q1. Company reached 110 on Jan expiry your loss with be $15

    Q2. Company drop to 50 on Jan expiry your profit with be $45

    Q3. Under the above structured trade, your max Loses will be $15

    Q4. Your theoretical loss will be infinitive if say stock go up to a trillion $ but actual practical loses is for you manage

    ( my planned loss can be 1-week ATR no. for a normal swing trade)

    Q5. Your loses will be $100 – $54


    All above nos is excluding commissions etc cost.

    You must have a trade & a risk management plan in place before you go into the market.


    Any more questions?

    If you are Singapore, let meet.
     
  6. tsaw

    tsaw



    Correction for Q5 . Your PROFIT will be $100 - $54 = $46


    .
     
  7. You should read "beat the market" by Edward Thorpe for some ideas that expand on this as well if your interested. I know the name sounds really cheesy but its a good read.
     
  8. You can try whatever you have in mind in the OL, use the Offline tab if you just want to play some hypothetical options, or compare two strategies.