[SIUYA]

Originally Posted by Josh7 »

I dont understand what you mean by Always buy short options back when they get near zero, and remember the most you will make on them is on the day you sell them. Can you explain? I noticed that this particular level involves great risk and it would seem more logical for Sharebuilder to have a level 3 which would enable credit/debit spreads to limit risk. I was informed that each broker has their own set-up for each level. Sharebuilder's level 2 may not necessarily be the same as another online broker.

if you are short an option (if you dont know what short means - dont trade options )
then the most you will make on that option is the amount you sell it for......you cannot get any more upside. so if you sell something for 50cents, then that is all you will make.
simple......
Also if you sell something for 50cents, and get the chance to buy it back for 1,2 or 3 cents do it. (anything near zero). A lot of people dont and figure that its practically worthless.
Wrong.....you have made the money, take the risk off the table and assume rather than selling for 50 cents you sold it for 47 cents - the money is the same, but the risk is reduced.
Otherwise, there will be 1 time in 20 (at a guesstimate ) that it will cost you plenty.

I cant be any plainer than that - if you still dont understand - dont trade options yet.

[Josh7]

oh ok so if you were to have looked at the head and shoulders pattern of say GMCR(assuming the method used to analyze this symbol was technical analysis) and you said ," I think this is going to go down once it breaks the support". Your view on the stock is that it will decrease in value so you "short an option" meaning you sell either a call or put. In this case it would be a put option? Lets say the stock is at $80. strike price of the put option that you short is $40. You receive 1.50 premium.

The put buyer(person buying from you for 1.50) will have his contract go up in value if the stock declines correct? However, as long as the price of the stock does not go passed the strike price of $40 it will eventually decrease in value due to time decay and should be bought back at 1 or 2 cents to eliminate risk.

Another way of shorting would be to short a stock(not option) to receive the premium and buy it back once the price has fallen a significant amount correct?

Originally Posted by SIUYA »

if you are short an option (if you dont know what short means - dont trade options )
then the most you will make on that option is the amount you sell it for......you cannot get any more upside. so if you sell something for 50cents, then that is all you will make.
simple......
Also if you sell something for 50cents, and get the chance to buy it back for 1,2 or 3 cents do it. (anything near zero). A lot of people dont and figure that its practically worthless.
Wrong.....you have made the money, take the risk off the table and assume rather than selling for 50 cents you sold it for 47 cents - the money is the same, but the risk is reduced.
Otherwise, there will be 1 time in 20 (at a guesstimate ) that it will cost you plenty.

I cant be any plainer than that - if you still dont understand - dont trade options yet.

[SIUYA]

josh stands for joshing right???

You sort of understand but really have no idea...and I mean this to help.
which is why you need to understand options far more before trading them.

if you think a stock is going to fall, why would you sell puts?
what if that stock goes to $20, before expiring above $40...eventually decrease is a possibility.....however, what if it goes from $1.5 to $20 first.

shorting a put gives you a long exposure. Shorting a call gives you a short exposure.
work that one out.

[Josh7]

Your right! I perceived the scenario as if I were a buyer not a seller of the option. If I think a stock was going to fall and I am selling I would sell a call option. If I were to short a call in this scenario it would give me a short exposure to risk since the stock is falling as opposed to shorting a put which would give me a long exposure to risk. As the price is decreasing the value of the put contract that you sell is increasing substantially so you can lose a great amount just by waiting for the option to expire worthless/around 1-2cents if it is already $20 close to expiration.

Originally Posted by SIUYA »

josh stands for joshing right???

You sort of understand but really have no idea...and I mean this to help.
which is why you need to understand options far more before trading them.

if you think a stock is going to fall, why would you sell puts?
what if that stock goes to $20, before expiring above $40...eventually decrease is a possibility.....however, what if it goes from $1.5 to $20 first.

shorting a put gives you a long exposure. Shorting a call gives you a short exposure.
work that one out.

[John Bradford]

Let's say you have a covered call on AAPL. Your short call is a Dec 400.

As Dec 17 gets closer, the price of that short call will fall... eventually getting to zero when it expires. Let's say it's Wednesday Dec 14, and the option is worth $.15. The most you can make by holding that option is $15 more. If AAPL for some reason gaps up $20 the next day, you could make $2000. So the benefit you would get ($15) is hardly worth the benefit you would lose ($2000) even though it is unlikely. So the risk/reward of holding an option to expiration isn't great.

Another way to look at it. The short call option provides downside protection. If I sell a call option on AAPL, for $10, I am gaining some downside protection. If AAPL falls $10, I'm at break even. However, if I wait till the call option has decayed to $.15, then I am protected to the downside by $.15. Big Deal. It's not worth having essentially no downside protection and limiting my upside. Again... close those expiring options several days early, perhaps a week early if they have lost most of their value.

John