Can someone who understands Stock Market "Put's" help me understand something?

Discussion in 'Mayberry Lounge' started by youandme, Feb 23, 2016.

  1. youandme

    youandme All on the DL.

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    I'm starting to understand options trading (I put it off for years, being intimidated by the concepts and scared off by people who have been burned by it in the past), but lately I've been reading up on it because I want more weapons at my disposal and I figure more information never hurt anything.

    Cutting through the jargon and the bullshit can someone just clarify an example for me?

    How I understand it:

    Lets say an S&P 500 company that pays a dividend is currently trading for $10.

    I like this company and feel like it's a bargain at $9.

    Because of this, I decide to write a put option. (I don't understand an average spread of timeline so bear with me).

    I say, I will buy these shares if they go to $9 or less. Until then, pay me my premium for assuming said risk.

    So if it stays above $9 and expires. Free money.

    If it goes to $5 and the contract is exercised, I must buy the shares. So my broker will add lets say the 100 shares to my account for 900$ so I'm clearly in the red for a few hundred.

    If I had just bought said stock like I normally would, at $9, (because it's a steal or so I believe). Getting the shares at that price, and keeping the free premium money anyway. What exactly is the downside here, assuming I don't leverage myself too far with liquid cash in my account?

    Also, can someone explain the general dividend situation here? Do I have to pay someone the dividend in the interim of the contract?

    Thanks and sorry if this post is derpy.
     
  2. Mr Mojo Lane

    Mr Mojo Lane Brown Belt

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    You buy a put if you think it is a shitty company, bad news comes out, etc, etc. You do not buy a put because you think that it is a bargain a certain price. Checking out the shares that are sold short helps too, but if good news comes out, you can have a short squeeze.
    Don't worry about dividends. I would not buy options until you are really good. I would get good at selling options before buying options. Options are no joke and I am fairly good at timing the market


    --if you buy a $9 put, the price has to be under $9 for you to make money
    --If you buy a $9 call, the higher it goes over $9 the better
     
  3. youandme

    youandme All on the DL.

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    yeah I'm trying to sell puts atm.
     
  4. MeatheadMike

    MeatheadMike Brown Belt

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    From what I understand hes not buying a put, hes wants to write one. So its the opposite.. he would make money if the option contract is never excersiceed (ie: the stock doesn't go below a certain value).
     
  5. Mr Mojo Lane

    Mr Mojo Lane Brown Belt

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    Ok. If he is writing one he is selling. I thought he was buying.
     
  6. MeatheadMike

    MeatheadMike Brown Belt

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    I think you have the jist of the put option, but not sure I fully understand the dividend question. I don't trade options, but AFAIK I don't think dividends have anything to do with option contracts.

    If you are writing a put option, you would only be required to buy stock if/when the contract is exercised. Which dividend are you referring to?
     
  7. MeatheadMike

    MeatheadMike Brown Belt

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    Generally PUT options are kind of risky if you don't know what you are doing.

    If you think the stock/index fund will go up in the near future, and want to make money off of options, you might want to consider buying CALL options instead of selling Put options. I believe that's less risky since the only money you would stand lose would be what you already payed for the CALL option contracts if they expire.
     
  8. Sharingan

    Sharingan Blue Belt

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    You're better off not writing any options unless you have a good amount of option trades under your belt.

    Selling a covered put requires you have to a short position of the underlying stock. You can sell a naked put but your broker will require more money.

    Most beginners start by selling covered calls against their long stock, or buying calls/puts. Avoid selling naked puts and calls.

    You would sell a put if you think the underlying stock would rise in price. In which case this is similar to buying a call option. Or just buy the stock itself, if it's relatively cheap.

    In general I'd just avoid options unless you're trying to hedge or making big leveraged moves. Options are used by big banks, with millions of shares which they can't sell, to hedge. They have lots of smart financial people who figure out all the details. To succeed with trading options, you need to be correct about both price AND time period. It's much more difficult than just being right about price OR time. Most of the time, the theta burn will end up killing you.
     
    Zankou likes this.

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