4 ms·

If I want insurance to protect against the price going down, I'd buy a put option. I know a bit about this but I'm not an expert on this. Naively, those put opt

• freeone3000 6y ago
  Options are bets in a way that actual sales aren't. Notably, a put explicitly a contract to sell something at a given price in the future. Nobody buying or selling a put has any intention of stock trading hands -- and the option can even be written as cash-only, where stock never actually does. So while selling a put is the same fundamental idea as a short ("I think the price will go down"), it's mechanically very different. A short sale is something very particular: it's selling something you're borrowing. The counterparty has actually bought a stock. Not an option, he can hold that stock for sixty years. This is fucking weird.
  • eru 6y ago
    You know that a put and a call combine to make a synthetic stock? See https://en.wikipedia.org/wiki/Put%E2%80%93call_parity https://en.wikipedia.org/wiki/Put%E2%80%93call_parity (If you write a put and a call for the same strike, you are basically in the same position as a short seller. If you buy a put and a call for the same strike, you are economically in the same position as an owner of the stock.) Hence, you can't separate options from stocks.
    • c1b 6y ago
      This is not entirely accurate. It is the same position as borrowing some amount of money to buy the stock. If I buy a put and call and the price at expiry is exactly that strike I am guaranteed to lose money.
      • egwor 6y ago
        Agreed. One of the reasons is that the option has a risk and therefore there's a cost associated with managing that risk and taking on the trade.
        • eru 6y ago
          Not quite. It's the 'risk-free bond' term that I dropped from my explanation of the put call parity. To replicate the stock, you'd buy the call and sell the put. The risk exactly balances out in the sense that a total portfolio of 1 stock short, 1 call long and 1 put short would have zero risk and behave like a risk-free bond. (If the risk premia of the long call and the short put would not exactly balance, you could make money with very simple arbitrage trades.)
      • eru 6y ago
        Yes, my explanation dropped the bond term from the put call parity.
    • freeone3000 6y ago
      Economically, sure, but not literally. If you hold both a put and a call, for instance, you can't vote with them, or earn dividends. You would not say you're the actual owner -- whereas a short sale creates a negative actual stock.
      • eru 6y ago
        And that's why voting rights get special treatment in share lending. Dividends are also handled by share lending agreements. When we talk about naked shorts, they would still have to be covered before delivery (usually two days after the trade). And when buying a normal stock, not from a short seller, you also can only vote once you take delivery. So everything is the same.
  • optimiz3 6y ago
    > selling a put is the same fundamental idea as a short Selling cash secured puts is risk equivalent to covered calls, but doesn't require stock. If anything it's a neutral/bullish strategy since max profit is above the strike.
  • egwor 6y ago
    I agree on the mechanism. If the objection is that someone can influence the price of an instrument without owning it (like in short selling (although in short selling you can borrow the instrument and then short it)), then should the argument be that put options should also not be allowed without ownership of the underlier too?
    • freeone3000 6y ago
      My objection is that synthetic stocks are weird, negative ownership is weird, and every time we have to actually count how much stock we have we come up too high. This doesn't happen with puts.