Short long put option
Unlimited in a falling market, although in practice is really limited to the strike - zero as a stock cannot trade negative. Like the Short Call Optionselling naked puts can be a very risky strategy as your losses can be significant in a falling market. Although selling puts carries the potential for large losses on the downside they are a great way to position yourself to buy long when it becomes "cheap". Selling a put option is another way of saying "I would buy this stock for [strike] price if it were to trade there by [expiration] long. A option put locks in the purchase price of a stock at the strike price. Plus you will keep any premium received as a result of the trade. You want to buy this stock buy option it could come off a bit in the next couple of weeks. If the drop occurs early, and it is significant i. If the drop in stock value occurs close to the expiration date and is not yet through the strike price, a good exit plan is to put a short stop order on the stock itself. That way you'll be covered on the exercise if it happens while leaving the option position open to capture the remaining time value. Say you bought Apollo Options contract at Strike Short Draw a Short Put Pay off at below prices ,,,,, I think I understand now. So there is no actual interest fees the trader is paying for that margin being issued from the broker for selling non-cash secured puts. But there will be hold long on a part of your account funds while the sold put is in play, thus not being free for other trades. Not being charged short interest fee on the non-cash secured margin amount while selling puts seems like a pretty good deal to me. I appreciate you being patient with some of us newer traders as we try to understand the game. Hi PK, I see - I think there is some confusion in terms here. What you're referring to is a "margin" account, where the broker "lends" you some portion of money to trade securities. However, for retails traders the margined borrowed value would typically only apply to stocks i. I could be wrong, but seeing as options and futures are already leveraged instruments it would be too risk for brokers to allow these to be traded on borrowed money. The margin I am referring to is the "initial margin" - or the amount of money allocated in order long support the position. Therefore, the broker needs to allocate some of put account to reflect the risk involved in this position. This amount is also called a margin. This margin won't "cost" you any interest; but will be deducted from the total amount of money in your account available for other positions. Let me know if not! Hi Peter, I guess I might have misunderstood the concept of margin account totally? I thought that margin account works this way: So going back to my example in the previous question, if I sold puts and stayed within that amount of 50k then I don't pay interest. But if I sold more number of puts and had to use 50k plus the 20k to cover my sold puts, I would be paying interest on the 20k short the broker? I hope I explained it, I know it's kinda long. Thank you very much! Hi PK, Yep, I hear you on the lower put to free up capital - but not sure on the interest side of things. I short under the impression that money allocated for margin doesn't impact interest earned on your balance? Maybe I'm mistaken - may need to clarify with option broker. Also, going for a put spread instead of naked put depends on your view of the stock. If you're punting on an upward movement and at the same time selling high vol options, then some downside protection is a good idea. However, you might also be keen to go long the stock at the strike level - if it short that price by the expiration date - and at the same time collecting some premium in doing so. Hi Peter, I tried posting several hours ago, but my question has not showed up yet so please excuse me if this ends up being a repeat post. Is it better to sell vertical put spreads instead of selling naked puts? I am asking because this will reduce the margin needed. Plus it would put up margin that I could use for another trade. I would like to hear your thoughts? Peter, Thanks for your response. Quick question, what is your thoughts on a vertical put spread instead of just selling puts? I know this reduces your net intake but doesn't it also reduce the margin needed? Thus freeing up margin for use in other trades and also reducing interest on the margin? Or do you think the money saved on interest on the margin is not usually equal to the amount needed to buy the put? Hi Pk, The problem is that as the put crosses the strike level there is no guarantee that it will still be under the strike at expiration - and hence in need to be exercised. What I option to get across is that the short put option still has time value left in it i. If you short the stock by putting in a sell stop order before the option expires, you could be left holding that position if the market rallies without taking delivery of the stock to offset it. Sure, you can go and buy back the stock, but by that time you will surely be making a loss. I would also love to know a better way to play short puts. Peter, I just came across this article today, don't know if you still get messages from it I'm kinda new to options and trying to learn. In your last response to Francois, you said that the risk is that if the stock rallies, you are left with only the short position. But what if we did the final part in Francois's suggestion and placed a stop order to sell if the stock recovers option 89? Hi Francois, Nice, I like your thoughts put this, thanks for posting! Protecting 'naked' positions when the market moves against you. Why not simply add a stock position place stop order at same time you short naked put or call to your naked positions when they get ITM? Adds slightly to cost of maintenance commission, spread but is definitely much cheaper than buying pack a deflated option Am I missing something here?? Well, I suppose that is the strategy ;- short the put, wait for it to decline until you reach your profit target. Peter, yeah it would be a loss if I bought a short I sold at a higher price -- that makes sense. But yes, the participant who holds the short position is the one who is ab ligated to deliver if assigned. It might not necessarily be the same person who was on the other side of your transaction. The options clearing house aggregates all of the option positions based off short trading through a process called novation see the section titled "Application in financial markets". Peter, it turns out there weren't any buyers for that option I was selling -- problem solved. I have another question, and I asked a similar one to this in the Long Call entry on this site. Is the person long buys the short put contract from me now obligated to fulfill the contract instead of me? Hi Newbz, what is the simulator you are using? I'm not sure how it all works with a simulator i. However, if the option is out-of-the-money and very close to expiration then it is possible that there won't be any buyers and you will just have to allow the option to expire worthless. I'm using a stock simulator for short putting and I'm trying to sell 10 contracts of a 50cent strike price. The bid is 0 and the ask is 20cents. Obviously selling it at 0 is pointless, so I tried 10cents and waited a bit Moved it to 5cents and waited I don't care about getting a sell price closer to the ask, but I don't want to settle on a bid of 0 either. This simulator only lets me increase the price in increments of 5cents, so I can't set my price to 1cent either. This is only paper trading so it's not a big deal, but what happens if I encounter this problem during real trading. The contract will never get sold because it's not at bid price, which is 0 so why would I sell it. Unless the position is valued against a price other than 0. What are your rates? By the time the option expires, if it is still out-of-the-money, then the price of the option will have traded from 0. Thanks for the quick reply Peter. I am using Etrade as the broker. I do see the margin of or so where there are accounting for what you are talking about. I am hoping that it doesnt have to get excerised and my concern is why the show of a loos. The strike price for the option I bought is which expires in a few days. Assuming we never get that low by the end of the week, say maybewhich would still showing a loss. What happens to the loss? Do i still get the premium? But your position will be revalued according to the current market prices, so with the option now at 0. However, because you are short a naked option your broker will also deduct some money from your account as a margin in case you are exercised and have to take delivery of the underlying position. In this case, option it is an index, there won't be an exercise so the margin is used as a buffer against a large loss. Is there a way that you can see the transaction breakdown to confirm? What broker do you use? Hi Peter I sold a naked put today I just wanted the premium for it. The market went down today and that same put is now. I am assuming i can let long expire but what about the loss, dows it expire with the option?. Is it charged to me? I'm not sure why. As I can see, long market is not that simple ir practice. If you take LDK solar, the put options are severly overpriced. The problem is that it is difficult to get the stock short, so you can't really hedge fully. And i guess you can't be sure you will profit since the short might be recalled anytime. Not a perfect market. Hi Sam, no you are right. This would present an arbitrage opportunity. Calls and puts must be priced according to the put call parity theorem. Read more about put call parity here. One more thing that is on long mind: If ATM call and put options are traded at a huge difference, might there be an arbitrage opportunity? What is my mistake? In this long, if you short the stock, long 2 calls and short the put, you will fully hedge yourself and stay long with profits from an increase in price. Am I missing something? I AM PUZZLED, so please tell me where is my mistake: Thank you in advance: Because you've sold the put your risk is that the market goes option and the buyer of the option exercises it. You would, however, keep the premium received when you initially sold the put option. Hi, I am a bit confused now: Isn't the maximum loss I can take is per share minus the premium per contract? In the same way as the put has a limited profit payout? Are there any other points I need to look into? How do options react to splits, bankruptcy and so on? I am pretty new in options trading, and sold a put with the plan to hold it until expiry, what are the risks involved? If you need to calculate the premium of an option then you will need to first understand the mechanics of option pricing. Then you will need a calculator - you can put my option spreadsheetwhich calculates an option's fair value. However, you'll probably not need to calculate the option price yourself - the bids and offers in the market are what you'll be buying and selling against anyway. There is a screen shot on this page that shows what we call an option chain. But it depends on the platform that you're trading with. I use Interactive Brokers and they have a "reverse position" button that if you click it opens up an order ticket to do the opposite of your existing position. Hello Peter, I just hate myself for bothering you again, but you seem to be the perfect options teacher. I have 4 questions as follows? How do you calculate the premium of the option? If the seller of the option realizes that he doesn't want to sell his option although he has placed a sale order, but no one has bought it yet, can he cancel his sale? Put the buyer enters the trading platform goes into the market to do his shoppingdoes he see a list of option contracts offered at different prices? Then he chooses to buy the one he wants that meet his specification, by placing an order? When offsetting the position, do you simply place a sale or purchase order? There is no specific offset button, right? Thank you so much and I hope that I don't have to bother you anymore after this. Although technically, you don't actually "pay" a margin to the broker. The margin amount is "allocated" from your account by your broker in case you incur a large loss. The difference is that you should still earn interest on the margin. Hello Peter, I think I understand almost everything now, thanks to your explanation. One last question is, if the seller of the put option or call option offsets his position, when he does that does the margin that he has placed short the broker get returned to him after he closes his position? Kind of - although the buyers and sellers at the time of the transaction are not necessarily the ones to swap obligations for delivery. If an option buyer decides to exercise, then the clearer will choose at random I believe a participant who has a short option position to exercise. This process is called novation. Do you mean that the seller let's call him seller a buys it back from any seller in this case, let's call him seller b in the market? Then, seller b the person he bought the option from will be obliged to buy from the original buyer whom he sold his put option to in the first place instead of him? Is that how seller a closes out his position and exits any obligations that he has on him? Thank you and sorry for taking so much of your time. You have been most helpful to me. A short position is offset in option same way that a long position is - by doing the opposite trade. In this case by buying the same option contract back from a seller in the market. Hello Peter, Now I am confused about how the seller of a put closes out his position. He will buy the same contract with the same strike price and expiry date to offset the one he sold. Now, who does he buy it from and how does this close out his position as the seller of the put contract and leaves him with no obligation? Thank you once gain for your help. In the case of a short put it is referred to as "naked" because your risk as the market sells off continues all the way until the market reaches zero. I don't understand what you mean by naked when you state "selling naked puts I understood that by selling a put option I might have the stock "put" to me at the strike price of the option, but I don't see what I'm "naked" of. Some solid tips there Joel I agree that selling the put is a good way to buy the stock for a bit less than the current selling price - in other words, to take advantage of a dip during the option period. So the strategy for dealing with otherwise idle and unneeded cash that is sitting besides an otherwise fully diversified portfolio: If you're basically bullish on the stock, you'll want to buy between them, expecting a bounce at or above the day line. If then option is called and you 'lose' the stock - although you've 'missed' additional upside, you've still made money - repeat all steps, including step 6 below. If it doesn't, then do all the stpe over again - you're only missing the upside of something you don't own. Here's how a short-put works: You either keep the put until expiration, or you buy the same put at whatever the current put-price is to "close" your position. If you close then your profit or loss is the difference between the sold put-price and the current put-price put-price is another way of saying "premium". If it looks like the stock-price will remain above the strike-price then you should probably hold the short position until expiration, because the put will probably expire worthless and you will be able to keep the "premium" you got for selling the put in the first place. If it looks like the stock-price will drop below the strike price at any time before expiration, because of expected bad news, bad earnings report, etc. PS-being long a put is the opposite of being short, i. It is only worthless if the underlying is trading above the strike price at the expiration date. If the underlying option trading below the strike price at the expiration of the option then the option is worth the strike price minus the underlying price, which is your loss if you are short the option. I don't understand why we use unlimited loss, because you know your losses right put day one that the maximum loss is when the option expires the option becomes worthless. All of these comments deal with short term loses or gains. For me the question is whether the stock or company in question is put good buy at some price. If you believe that Goodyear is a good buy in any case at 15 and the stock is 20 who is really worried if Goodyear goes to 5 in the short term. All my equities have loss value lost value in the past year. Do I like it? But I am not in the market short put. Do I expect the market to go to zero. If it does then I have a lot more to option about than the lost of a few dollars. Goodyear long zero is absurd If you are so worried about loss stay out of the market. If you are long-term bullish then selling puts makes sense. You aren't anticipating the stock to drop If the stock is above the strike at expiration you keep the premium. I mentioned it below too: Unlimited in a falling market. Hi Marlowe, Not sure what you mean. Are you saying that your broker won't allow you to sell a put option? I would like to carry out the AAPL trade for real, however I am told I can not carry naked put. But, I can buy a call which will cover me. What are the suggestions for this? Happy to own the stock. There can be large losses if the strike is large, but there is certainly limited downside. A short put means that you are obligated to buy the underlying at the strike price if the buyer decides to exercise. So the payoff is the stock price minus the strike price less the premium received. Once the underlying stock trades below the strike price price the option becomes out of the money. The option will continue to lose money as the stock continues a downward price movement. I guess it is not really unlimited as a stock price cannot go below 0. Isn't the maximum loss for a short put the Strike price, not unlimited? This is not including the premium made on the sell of the put. So the net loss would be the Strike price minus premium. Limited to the premium received for selling the put option. Characteristics When to use: When you are bullish on market direction and bearish on market volatility. Bullish Long Call Short Put Long Synthetic Call Backspread Call Bull Spread Put Bull Spread Covered Call Protective Put Collar Bearish Short Call Long Put Short Synthetic Put Backspread Call Bear Spread Put Bear Spread Neutral Iron Condor Long Straddle Short Straddle Long Strangle Short Strangle Long Guts Short Guts Call Time Spread Put Time Spread Call Ratio Vertical Spread Put Ratio Vertical Spread Long Call Butterfly Short Call Butterfly Long Put Butterfly Short Put Butterfly. Comments 56 Option March 23rd, short 6: Sk March 22nd, at 6: Let me know if there's anything else. Thanks again Peter February 22nd, at 9: Pk February 20th, at Peter February 19th, at Pk February 19th, at 1: Thanks, Ok Peter February 17th, at 4: I would also put to know a better way to play short puts ;- Pk February 16th, at 8: Francois April 28th, at 7: Francois April 26th, at Peter March 5th, at 5: Newbz March 1st, at 7: Peter March 1st, at 6: Newbz March 1st, at 4: Peter March 1st, at 4: Newbz March 1st, at Peter November 16th, at 7: Mark November 16th, at 6: Peter November 16th, at short Mark November 16th, at 4: Peter September 7th, at 7: Sam September 6th, at 1: Not a perfect market Peter September 5th, at 5: Sam September 1st, at 6: Peter September 1st, at 2: Sam September 1st, at 2: Peter August 9th, at 4: Nat August 9th, at Peter August 8th, at 7: Nat August 8th, at 7: Peter August 8th, at 1: Nat August 8th, at Peter August 7th, at 7: Nat August 7th, at 7: Peter July 14th, at Larry July 14th, at 9: Peter October 25th, at 7: Joel October 25th, long 5: Mike Griffin September 23rd, at 5: Peter August 11th, at 6: Emmanuel Armah August 11th, at Mjasko April 16th, at If you are long-term bullish then selling puts short sense Admin February 15th, at 2: SGL February 15th, at 1: Admin December 18th, at 6: Marlowe November 27th, at Admin November 7th, at 7: Admin September 23rd, at So the net loss would be the Strike price minus premium Add a Comment Name.
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