>>What do you mean by a closing transaction?
An opening transaction occurs when you enter a position
(short or long) on an option. A closing transaction
simply means you exit a previously held position by
executing the reverse, or closing, transaction.
If you hold no APM puts and you buy 10 Apr 10s, you
have executed an opening transaction. When you
sell them, that is a closing transaction. Exercising
is also closing.
>>If someone is selling puts, doesn't it follow that
someone else is buying them?
Sure, but it doesn't follow that the outstanding interest
is increased or decreased. It depends on whether or
not the seller and buyer are executing opening or
closing transactions. If they're both closing, OI
decreases; if they're both opening, OI increases; if
one is opening and one is closing, OI remains the same.
Say that with no APM position at all I offer to sell 10
APM APR 10 puts, and you, also with no position, buy my
10 puts. We've both made opening transactions; I'm short,
you're long. I (we) have just created 10 option contracts
that didn't exist before. OI increases by 10.
Later, it happens, you decide to close your winning position
and I decide to eat my losses. You offer to sell your
10 long puts (a closing transaction) and I buy them to
cover my 10 short (another closing transaction). The
10 contracts now cease to exist; OI decreases by 10.
Ok, suppose you decide to sell your winning puts (closing), but
I say *&^%&^*, I'm just going to hang on and lose a bit
more before supper. However, someone else buys your
10 puts who didn't own any (an opening transaction). In
that case a transfer of an existing contract occurs (in
effect), and OI stays the same.
>> buy shares and sell puts to hedge if you expect a rise - is this something someone would do?
Someone might do anything, but in effect selling puts is the
same as buying shares and then writing a call on those shares
(a covered call).
You might buy stock AND sell (write) puts on the same stock
(by that I mean the same security, you can't WRITE a put
on the actual shares you bought)
if you wanted to own twice the shares than you were willing
to put up cash or margin loan to cover. You
could write an in-the-money put which moves like the stock
up to the put's strike price. Not a hedge; a leveraging
device. |
