<< Hi there! I am just curious and trying to understand this so I can learn something.>>
Franz: I'll be happy to explain why I ended up with 2K shares of CPQ by selling puts. For those on the thread, this will be somewhat lengthily if you understand short puts (selling of puts).
Franz, first, a short put, also known as the sale of a put, is a promise to pay someone XX dollars for a given stock. Using my own experience last month, I'll walk you through this.
Late February, I felt CPQ was going to be higher than $35 between 2/23 and March 19. Therefore, I sold 10 puts to someone (probably a fund) for a promise to pay them $35 a share between 2/23 and the options 'X' day on March 19. For that promise I received $1625.00. In other words, if CPQ was above 35, I would keep the premium. Not a bad deal. However, if CPQ was under $35, I had promised to pay $35 a share to the owner of the put. My thinking at that time was, if CPQ went below $35, it wouldn't be by much and I would immediately sell covered calls.
As it turned out, CPQ was less than $35 on options 'X' day, so I had to buy the stock for $35 even though is was selling for considerably less. ( I believe about $27). On or close to options 'X' day, I could have just purchased the put and immediately taken the loss. Many people do this. Again, I thought I would see a quick recovery, and I wanted CPQ in my inventory anyway. Simply stated, I had to pay $35 for a stock which had a market price of $27.
Because I was the proud owner of CPQ, with their untimely announcement about no earnings, I immediately started selling covered calls. Selling covered calls limits my upward movement, but gives me a chance to recover my losses. There are other more sophisticated moves you can employ to make this loss bearable, however they entail more risk.
The reason I ended up with 2k shares, is I did the same thing with puts at $32.5.
Pleae le me know if I can be of further help,
Mike |
