PUT OPTION & SOLD LEG ( BEAR CALL SPREAD ) confusion. Please help !!!!

Discussion in 'Options' started by XM911E3, Jul 19, 2007.

  1. XM911E3


    Hi everybody, I am currently playing around with Call Option and bear call spread only. I use bear call spread only when my call option gap down. I close my BOT leg only after I close my SOLD LEG or else I will be selling naked. Now that I've master this method, I am going to playing PUT OPTION. But I don't really understand PUT OPTION so I am going to understand it before putting real money for PUT OPTION.

    I am quite confuse about PUT OPTION...isn't it the same like selling naked? It's like you borrow from the broker at high price then sell it and then when market drop all the way, you buy back cheap price and return the broker.

    What is the difference between selling naked and PUT OPTION?

    Selling naked - unlimited risk cuz if the stock price goes up all the way, you could lose you whole account.

    PUT OPTION - Please kindly explain to me.
  2. If you're long a put option, say, the IBM August 110 put, it gives you the right to sell 100 shares of IBM stock at $110/share any time between now and August 18. If you're short a put option, you may (if the holder of the long put exercises their put) be obligated to buy 100 shares of IBM at $110. If IBM closes at or above $110/share on August 17, the put is worthless.

    If you're long a put option, the most you can lose is the amount you paid for it.

    If you're short a put option, your loss can potentially be 100*the strike price (well, less the premium you got for selling the option). If IBM goes to $0, you'll still be obligated to buy 100 shares at $110/share.

    (Note that some options use a multiplier other than 100.)