>If the price starts moving down, couldn't you just sell short to protect yourself against the losses until the option expires? There would be some margin cost but it would probably be cheaper.
If the price moves to the strike price, why not just immediately repurchase the stock? - John
John, the object of trading options is not to own the stock - the options are traded just as the stock is.
There is no reason to purchase either the stock or a short as you stated above.
When you initially go into a position - wheather a buy or sell of either a put or call - you are "opening" a position. If the stock starts to go against your position, ie, you start to lose moeny, you just "close" the position by taking the opposite action as when you "opened".
Example - you buy a call, expecting the stock to go up but it goes down instead. You then sell a call to close the position at a small loss - usually far less that if you owned the stock itself - to "close".
But if one wants to own the stock, one can do so at a much less risky positon by using options.
As an example, one buys a call and sells a put, same strike price, one is now in exactly the same position as owning the stock* - but at a fraction of the cost to do so.
Since someone gives you money on the put you sold and you give someone else money on the call you bought, it is very close to a wash in many cases - can even be a net plus in some cases.
Now, it the stock goes up, you make money, if it goes down you lose money.
You have almost no money out of pocket and must maintain only a 20% equity in your account on the sold put side only.
* Note that the one advantage to owning the stock is that you get any dividends that are paid - an options holder does not do so. An option holder does, however, particapate in all splits.
One can also "insure" ones profits in a stock just as one would buy insurance on his home, life or vehicle.
There are several good books on options - McMillan is considered "the man" - and please don't start trading options until MUCH study has been done. Although they are very powerful investment and trading tools, they are not simple and not something to go into with little knowledge.
And PLEASE, if you read Wade Cooks book on covered call writing, take it with a very small grain of sand - and follow up with more study.
jb |
