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Strategies & Market Trends : Options 201: Beyond Obi-Wan-Kenobe
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To: rydad who wrote (11)8/10/2001 11:24:14 PM
From: BDR  Read Replies (1) of 1064
 
<<I don't quite understand this. How do you stop out of a (sell put?) position.>>

Either set a mental stop such that , if the value of the put increases to that level (the stock is falling) you will place an order to buy it back and take your loss, or place a buy stop order which will automatically do the same thing for you when the put reaches that price. I don't actually know if one can place buy stops on options or whether they would work very well with infrequently traded issues as many options are. You may need the services of a real live broker for this.

As to why the put seller could get out with less of a loss than the stock buyer, that has to do with the difference in the delta or the change in the option price for each dollar change in the stock . For example, look at what has happened to my short put on SEBL:

8/8/01 with SEBL at about 32.50 I sold Nov 30 Puts for 4.90. The put seller and the stock buyer that day both hope it will go up. Today SEBL closed at 28.29 and the ask for the Put is 6.00. If we both decide that SEBL is actually going down the crapper and we would like to close out our positions at the end of day prices if we could, look what has happened:

Buyer 32.50-28.29 = loss of 3.21

Put seller 6.00-4.90 = loss of 1.10
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