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Options should be used as intended: as a hedge. E.g. If I am net long in my portfolio and I fear some headwinds I can buy a put or two for the peace of mind. N

Options should be used as intended: as a hedge. E.g. If I am net long in my portfolio and I fear some headwinds I can buy a put or two for the peace of mind. Now those puts should be always considered as worthless, and it is just the price to pay for the peace of mind. Similarly you sell options. Trading options on the other hand is just pure gambling. Even if you get the direction right you likely won't get the timing right (or the volatility). edit: typo

tim333 6y ago
You can also write them in a low risk way for the benefit of others. If you hold some stock write options for people to buy it off you for twice what you paid, or if you are thinking of buying a stock write options for people to sell it to you at lower than the current price. But yeah trading can be iffy.
- nemo44x 6y ago
  The problem with covered calls is you take on all the downside risk of the stock collapsing and get none of the upside gains if the stock rockets. Writing way OTM covered calls will not net many proceeds unless the stock is super volatile which means you likely have a lot of downside risk. A good example from recently is Ford. Was trading at around $6 a few months ago and not too volatile. OTM calls were pretty cheap that were a few dollars up and essentially worthless at double the price. Anyone writing those was getting almost no premium. But then the stock took off quickly and hit over $12. Anyone who wrote those calls enjoyed none of those gains. So even a stock like $F can move in very unpredictable ways.
throw0101a 6y ago
> E.g. If I am net long in my portfolio and I fear some headwinds I can buy a put or two for the peace of mind. Now those puts should be always considered as worthless, and it is just the price to pay for the peace of mind. Why don't you just change your allocation? If you can't sleep at night because of your current portfolio, and gyrations that are occurring, or that you are worried could occur, I would say it's obvious that it's not suited towards your risk profile. You're burning up some of the potential upside by spending money on the options, so why not simply take some money off the table instead and have a less complicated setup?
- yreg 6y ago
  Year ago when we were reading the news about what is happening in Wuhan, some of my friends bought SPY puts as an insurance against the potential crisis. The best outcome for them would be if those puts expired worthless. When you insure your house, you don't usually wish for it to burn down. I haven't acted and my portfolio took a -30% hit right after. Your suggestion (to change the portfolio allocation) would mean temporarily selling stocks and holding money. That strategy has an unlimited loss potential[0] if the stocks rise before you buy them back. With puts you are limited to whatever you pay for them. edit: [0] unlimited loss potential provided you want to keep the same stake at the companies
  - sokoloff 6y ago
    I had SPY puts expiring in April at the same time, but as a hedge against Bernie Sanders doing unexpectedly well on Super Tuesday. He didn’t, but my timing was still good against a factor that I had been entirely ignoring.
  - metafunctor 6y ago
    How does holding money have an "unlimited loss potential"? You just buy back at whatever value the stock is at the time. I would argue that money is a neutral position (adjusting for inflation which is nowadays quite low). After all, we buy stuff with money, not stock. Now, selling short, that has an unlimited loss potential, but it's very very different from a cash position.
    - mattmaroon 6y ago
      It’s unlimited because in the time he is holding cash there’s no limit to the amount the stock market could increase. If he sells a stock for $10, and then it goes from $10 to $10,000 he’ll only be able to buy back 1/1,000th of what he had. He lost $9,990. It’s the same as writing call options. There’s defined upside and unlimited downside.
      - gowld 6y ago

tim333 6y ago

You can also write them in a low risk way for the benefit of others. If you hold some stock write options for people to buy it off you for twice what you paid, or if you are thinking of buying a stock write options for people to sell it to you at lower than the current price. But yeah trading can be iffy.

nemo44x 6y ago
The problem with covered calls is you take on all the downside risk of the stock collapsing and get none of the upside gains if the stock rockets. Writing way OTM covered calls will not net many proceeds unless the stock is super volatile which means you likely have a lot of downside risk. A good example from recently is Ford. Was trading at around $6 a few months ago and not too volatile. OTM calls were pretty cheap that were a few dollars up and essentially worthless at double the price. Anyone writing those was getting almost no premium. But then the stock took off quickly and hit over $12. Anyone who wrote those calls enjoyed none of those gains. So even a stock like $F can move in very unpredictable ways.

throw0101a 6y ago

> E.g. If I am net long in my portfolio and I fear some headwinds I can buy a put or two for the peace of mind. Now those puts should be always considered as worthless, and it is just the price to pay for the peace of mind. Why don't you just change your allocation? If you can't sleep at night because of your current portfolio, and gyrations that are occurring, or that you are worried could occur, I would say it's obvious that it's not suited towards your risk profile. You're burning up some of the potential upside by spending money on the options, so why not simply take some money off the table instead and have a less complicated setup?

yreg 6y ago
Year ago when we were reading the news about what is happening in Wuhan, some of my friends bought SPY puts as an insurance against the potential crisis. The best outcome for them would be if those puts expired worthless. When you insure your house, you don't usually wish for it to burn down. I haven't acted and my portfolio took a -30% hit right after. Your suggestion (to change the portfolio allocation) would mean temporarily selling stocks and holding money. That strategy has an unlimited loss potential[0] if the stocks rise before you buy them back. With puts you are limited to whatever you pay for them. edit: [0] unlimited loss potential provided you want to keep the same stake at the companies
- sokoloff 6y ago
  I had SPY puts expiring in April at the same time, but as a hedge against Bernie Sanders doing unexpectedly well on Super Tuesday. He didn’t, but my timing was still good against a factor that I had been entirely ignoring.
- metafunctor 6y ago
  How does holding money have an "unlimited loss potential"? You just buy back at whatever value the stock is at the time. I would argue that money is a neutral position (adjusting for inflation which is nowadays quite low). After all, we buy stuff with money, not stock. Now, selling short, that has an unlimited loss potential, but it's very very different from a cash position.
  - mattmaroon 6y ago
    It’s unlimited because in the time he is holding cash there’s no limit to the amount the stock market could increase. If he sells a stock for $10, and then it goes from $10 to $10,000 he’ll only be able to buy back 1/1,000th of what he had. He lost $9,990. It’s the same as writing call options. There’s defined upside and unlimited downside.
    - gowld 6y ago