OOPs! I guess Dale types fasta den me
rydad,
I don't quite understand this. How do you stop out of a (sell put?) position.
Anytime you sell something before you buy it, whether it be an option or stock, you hope it will decrease in value so you can buy it back cheaper. In the case of a short option, it might expire worthless, and you don't have to buy it all. But if the thing starts to increase in value, the risk grows that you will ultimately have to pay more for it than what you got by selling it. Stopping out in this case means buying it back before it gets too expensive.
Say you sell a QCOM SEP65 put for $5. That put has a delta of -50%, which means in the near term for every dollar QCOM drops, the put goes up $.50. If QCOM drops $4, the put goes up about $2. If you decide QCOM is going lower (sorry guys) and you want out, buy the put back at $7 (probably more like $7.30 or $7.40 because of the bid ask spread). Someone who bought the stock could stop out with a $4 loss, while your loss is only about $2. The longer you let it go, the faster the rate of increase of put price as the stock falls. That works against you. But the longer the stock holds up, even if it just stays level, the better off you are because the put loses value with time. If QCOM stays level for 3 weeks and then starts falling, you might even get out with a little profit for your trouble.
If QCOM goes up, the put loses value even faster than it would with just time, but as the value shrinks the rate of change gets much smaller. It is often best to buy it back at a low price instead of trying to hold out for the last few cents.
An engineer type like yourself would appreciate the strategy analyzer available at the link I posted. If you have Excel, it is well worth the effort to learn to use it. Has very nice graphical displays and lets you track the evolution of any position with price and time. I'd be glad to walk you through what I have learned about the tool.
Dan |
