3 ms·

The reasonable approach to options, if you’re not trying to go crazy speculating, seems to me to be hedging strategies. Or selling options to take a little each

The reasonable approach to options, if you’re not trying to go crazy speculating, seems to me to be hedging strategies. Or selling options to take a little each sale if you don’t mind the somewhat lesser risk dependent on the type of market at play. All that said, that’s my armchair take as I don’t mess with them outside of Wall Street Raider.

aeternum 4y ago
They can also make for a great entry/exit strategy: Want to buy and hold a company but think it's a little too expensive right now? Sell a put, and make risk-free return while you wait. Want to sell that tech stock you've been holding once it doubles? Forget your limit order, that's for the boomers over at vanguard. Sell a call today!
- spacemadness 4y ago
  Apparently I really don’t understand options. Why would you sell a put and not buy a put or alternatively sell a call if you think a stock is going to go down? Or is this saying you believe it’s too high and will remain high likely past the expiration date of the option? Likewise with your second example.
  - aeternum 4y ago
    Selling a put can be thought of as similar to a traditional limit buy order. For example say you think Meta is a buy at $90. But Meta is trading at 109.57, so sell a put with a strike of $90 and collect a premium in return for agreeing to purchase a stock at $90. If the stock hits 90 or below the contract will be executed and you will purchase the shares at $90 (same as you were going to do with a limit order). If it doesn't hit 90, you still pocket the premium. It's like getting paid for having a limit order.
    - MikeDelta 4y ago
      Note that this means that, in a more extreme case, if Meta drops to $40, you still have to buy at $90 via the option, realizing a loss of $50 per contract. It's getting paid for taking on risk. A limit order will execute at your level or better, not worse.
  - pjob 4y ago
    The idea is that you have a specific entry price in mind and are waiting until it drops to that point. While you wait, you can collect a premium from selling the option. Let's say that based on your assumptions you think stock X would need to drop to $6 for you to make a good enough risk-adjusted return, but it's currently trading at $7. While you're waiting for the price to drop you could sell a Put (generally a cash-secured put) to collect a premium. If the stock price drops below $6 within the duration of your option, you'll get assigned the stock at the price you wanted ($6), but if it stays above this price the option expires worthless and you keep the premium. There's too much detail to cover in a short comment, but the main risks with a strategy like this is that the price drops well below your strike price and you're forced to buy the stock at higher price than the current market value. For cash-secured puts, you'll also need enough cash in your account to cover the purchase of the stock at your strike price. That said, depending on your mindset and goals, this can be a way to generate income while waiting for the right price. The opposite side of this also applies for exiting positions. You can sell calls on a stock you own (covered calls) to collect a premium while you wait for the price to reach your chosen strike price. The risk being the potential that the price blows past your strike price, your shares get called away, and you don't get to profit from the extra gains above the strike.
  - clejack 4y ago
    You can sell a put at a strike price you believe is reasonable and collect the premium for guaranteed. If the strike is hit, you've bought in at what you believed was a reasonable price at the time of your contract creation. You may technically show a "loss," but you're getting something you wanted at the price you wanted. If you buy a put instead you're effectively saying you strongly believe that the stock will fall to $x, and in this case, the fall to x will generate more money than the cost of the premium. The second scenario is hard to get right because the option already has the statistical behavior of the stock priced into the premium. Your knowledge needs to be better than the collective knowledge of the market to make this viable
    - deleted 4y ago
      [deleted]
  - guga42k 4y ago
    What you describe is directional trade (aims to capture up/down moves in underlying). Investment banks usually trade in volatility space, also called delta hedged. Main idea they would sell options (calls or puts) by adding extra premium to the fair price. At the same time they make the whole portfolio delta neutral by buying and selling underlying instruments on daily basis. By having significant portfolio one could expect to leak less on the hedging process and may be use some correlation between underlyings and use index futures instead of individual stocks. The whole business is to capture the premium mentioned above without predicting up or down move.
- chollida1 4y ago
  > Want to buy and hold a company but think it's a little too expensive right now? Sell a put, and make risk-free return while you wait. This is not risk free:) In your scenario you can either buy the stock at your entry price, call it $100 If you sell a put with a strike of $100 then you do get paid a premium, say $1, for that but if the stock closes at say $80 then you have locked in a loss, there is no risk free return happening in this scenario. You can try and trade your way out of this but if the stock starts to move against you it will cost you more than you got paid to buy back the put. There is nothing risk free going on here:)
  - mox1 4y ago
    His point was if you are about to literally buy the stock, there is no downside to selling a put (upside is a different story of course). Especially Cash secured puts.
    - chollida1 4y ago
      Well that's where you are wrong. There is potentially a huge amount of downside. The moment you write the put, you are explicitly stating when you buy the stock, if the put ends in the money, as dictated by the expiry. And if the stock dips far below that amount by the expiry then you have alot of downside that you wouldn't have had if you didn't write the put. Nothing is free, you write a put and the stock goes down you end up owning the stock that you are ownings at a loss from day one.

aeternum 4y ago

They can also make for a great entry/exit strategy: Want to buy and hold a company but think it's a little too expensive right now? Sell a put, and make risk-free return while you wait. Want to sell that tech stock you've been holding once it doubles? Forget your limit order, that's for the boomers over at vanguard. Sell a call today!

spacemadness 4y ago
Apparently I really don’t understand options. Why would you sell a put and not buy a put or alternatively sell a call if you think a stock is going to go down? Or is this saying you believe it’s too high and will remain high likely past the expiration date of the option? Likewise with your second example.
- aeternum 4y ago
  Selling a put can be thought of as similar to a traditional limit buy order. For example say you think Meta is a buy at $90. But Meta is trading at 109.57, so sell a put with a strike of $90 and collect a premium in return for agreeing to purchase a stock at $90. If the stock hits 90 or below the contract will be executed and you will purchase the shares at $90 (same as you were going to do with a limit order). If it doesn't hit 90, you still pocket the premium. It's like getting paid for having a limit order.
  - MikeDelta 4y ago
    Note that this means that, in a more extreme case, if Meta drops to $40, you still have to buy at $90 via the option, realizing a loss of $50 per contract. It's getting paid for taking on risk. A limit order will execute at your level or better, not worse.
- pjob 4y ago
  The idea is that you have a specific entry price in mind and are waiting until it drops to that point. While you wait, you can collect a premium from selling the option. Let's say that based on your assumptions you think stock X would need to drop to $6 for you to make a good enough risk-adjusted return, but it's currently trading at $7. While you're waiting for the price to drop you could sell a Put (generally a cash-secured put) to collect a premium. If the stock price drops below $6 within the duration of your option, you'll get assigned the stock at the price you wanted ($6), but if it stays above this price the option expires worthless and you keep the premium. There's too much detail to cover in a short comment, but the main risks with a strategy like this is that the price drops well below your strike price and you're forced to buy the stock at higher price than the current market value. For cash-secured puts, you'll also need enough cash in your account to cover the purchase of the stock at your strike price. That said, depending on your mindset and goals, this can be a way to generate income while waiting for the right price. The opposite side of this also applies for exiting positions. You can sell calls on a stock you own (covered calls) to collect a premium while you wait for the price to reach your chosen strike price. The risk being the potential that the price blows past your strike price, your shares get called away, and you don't get to profit from the extra gains above the strike.
- clejack 4y ago
  You can sell a put at a strike price you believe is reasonable and collect the premium for guaranteed. If the strike is hit, you've bought in at what you believed was a reasonable price at the time of your contract creation. You may technically show a "loss," but you're getting something you wanted at the price you wanted. If you buy a put instead you're effectively saying you strongly believe that the stock will fall to $x, and in this case, the fall to x will generate more money than the cost of the premium. The second scenario is hard to get right because the option already has the statistical behavior of the stock priced into the premium. Your knowledge needs to be better than the collective knowledge of the market to make this viable
  - deleted 4y ago
    [deleted]
- guga42k 4y ago
  What you describe is directional trade (aims to capture up/down moves in underlying). Investment banks usually trade in volatility space, also called delta hedged. Main idea they would sell options (calls or puts) by adding extra premium to the fair price. At the same time they make the whole portfolio delta neutral by buying and selling underlying instruments on daily basis. By having significant portfolio one could expect to leak less on the hedging process and may be use some correlation between underlyings and use index futures instead of individual stocks. The whole business is to capture the premium mentioned above without predicting up or down move.
chollida1 4y ago
> Want to buy and hold a company but think it's a little too expensive right now? Sell a put, and make risk-free return while you wait. This is not risk free:) In your scenario you can either buy the stock at your entry price, call it $100 If you sell a put with a strike of $100 then you do get paid a premium, say $1, for that but if the stock closes at say $80 then you have locked in a loss, there is no risk free return happening in this scenario. You can try and trade your way out of this but if the stock starts to move against you it will cost you more than you got paid to buy back the put. There is nothing risk free going on here:)
- mox1 4y ago
  His point was if you are about to literally buy the stock, there is no downside to selling a put (upside is a different story of course). Especially Cash secured puts.
  - chollida1 4y ago
    Well that's where you are wrong. There is potentially a huge amount of downside. The moment you write the put, you are explicitly stating when you buy the stock, if the put ends in the money, as dictated by the expiry. And if the stock dips far below that amount by the expiry then you have alot of downside that you wouldn't have had if you didn't write the put. Nothing is free, you write a put and the stock goes down you end up owning the stock that you are ownings at a loss from day one.