Investing megathread extravaganza

[DaFace]

A place to talk about investing stuff.

[lewdog]

Originally Posted by petegz28

A) You short a stock you own by selling it
B) If you want to short a stock you own without selling it then you buy puts that total more shares than you own. So if you own 500 shares and you want to short 500 shares then you need to buy 10 puts.
C) You buy a stock at 19 and then buy puts. Depending on the Puts you buy and how fast they gain in value, you could offset your 2 point loss and make more than 2 points on the Puts. That's tough going though.

There are 2 ways to use Puts effectively...

A) As a hedge on your current investment
B) To buy stock you want at a cheaper price than today's value

Warren Buffet does this a lot. If he wants to buy a stock that's at $50 but he says, I will pay $47 then he will write a ton of $47 Puts. If the stock comes down he gets it at his $47 but it may be lower by then. He doesn't care cause he thinks $47 is a price he will eventually profit from. If the stock doesn't go down or continues to go up, he pockets the premium and ladders up.

The 3rd and most unsuccessful way to make money on Puts is the same, most unsuccessful way to make money on Calls. Buy them outright and hope you're right about time and direction.

Buyers of options lose money 90% of the time. You got the guys who talk a lot on CNBC and what not about calendar spreads, credit spreads, condors, this, that and the other thing. And by the time you factor in the Bid\Ask along with commissions, you are making really dick on most of them.

This is great. Makes total sense reading this. Thank you so much.

I think Buffet's choice to sell a put on a stock you want to purchase anyway could be greatly used without having a ton of risk. Lowers your net cost of the shares as well if the purchase goes through from what I can tell? The rest of the options you mention seem pretty risky. Was reading about short selling where you in a sense borrow shares and later have to buy them back. Read some horror stories on investors losing their shirts on that!

Thanks Pete.

[lewdog]

So let's say I'd consider buying 100 shares of GE but only if it hit $15/share (currently $17.76). Instead of just writing a limit order for GE at $15 GTC, I could write a "Sell a put" option for that price, set to expire at some time in the future (is my terminology correct?). Where do you find the premiums offered for such an option?

[petegz28]

Originally Posted by lewdog

This is great. Makes total sense reading this. Thank you so much.

I think Buffet's choice to sell a put on a stock you want to purchase anyway could be greatly used without having a ton of risk. Lowers your net cost of the shares as well if the purchase goes through from what I can tell? The rest of the options you mention seem pretty risky. Was reading about short selling where you in a sense borrow shares and later have to buy them back. Read some horror stories on investors losing their shirts on that!

Thanks Pete.

Short selling stock can make you money just like buying stock. I have nothing against short selling. The rule is "Bulls make money and Bears make money but Sheep get slaughters". In a down market or if you know of a stock that is going to tank, short it, by all means.

But doing it via options is a pain because time is against you. If you just short it outright you only have to worry about a margin call but should be out long before then.

But yes, when you short a stock you are literally borrowing it from someone with the agreement to give it back at some point in the future. A lot of people had made a lot of money shorting stocks. Some do it exclusively.

Buffet does lower his cost if his options get exercised. Figure he writes 1000 Puts at a strike of $47 on a stock that is trading at $50. Say he gets $1 a contract. So if the stock drops below $47 and he has to buy, he has the gross profit of $1 a share to cushion any loss. So really he doesn't even take a loss until the stock hits $46. Anything between $46-$47 he actually walks away ahead even though the stock is below the strike price he wrote against.

A lot of big stock buyers use this strategy but it's just as effective for the little guy. As long as you are willing to live with the stock below where you bought it. Buffet is a long term player so if he gets stuck with a stock at $44 that he paid $47 for, it doesn't bother him.

[petegz28]

Originally Posted by lewdog

So let's say I'd consider buying 100 shares of GE but only if it hit $15/share (currently $17.76). Instead of just writing a limit order for GE at $15 GTC, I could write a "Sell a put" option for that price, set to expire at some time in the future (is my terminology correct?). Where do you find the premiums offered for such an option?

You don't write a "sell a put". You simply write a put.

Write = sell to open
Buy = buy to open

And what you would be doing technically is selling a naked Put. So you will have to post whatever margin requirements your broker has but yes you got the idea.

No need to sit with a limit order. Sell the put and pocket the premium while you wait to see of the stock comes to you. If it doesn't, you make your premium, rinse and repeat. If it does, you make your premium and get the stock at $15.

You find the premiums just buy looking at the options table on the stock. So if GE is at $17 and you want it at $15 you would sell a January $15 put to open.

However, this all sounds better than it is.

A) The premium you'll get will be next to nothing after commission on only 1 contract
B) a stock like GE is not volatile so the options won't be worth much

The more volatile a stock is the higher the option premiums are

Think of writing options as being "The House". You make your money little by little but consistently.

[lewdog]

Last question (for tonight) but now I am confused on the terminology and what they mean. Did a screenshot of my scenario on GE when looking up the option chain on TD Ameritrade.

If I wanted to sell a put on GE at $15, would I select the "buy" or "sell" option on this chart (what's the difference?)? What do the bid and ask prices represent in this?

[petegz28]

Originally Posted by lewdog

Last question (for tonight) but now I am confused on the terminology and what they mean. Did a screenshot of my scenario on GE when looking up the option chain on TD Ameritrade.

If I wanted to sell a put on GE at $15, would I select the "buy" or "sell" option on this chart (what's the difference?)? What do the bid and ask prices represent in this?

Okay, let's start here...

Bid = the price you will sell at or, the price the market maker will buy from you...

Ask= the price you will buy at or, the price at which the market maker will sell to you...

When you buy a stock, option, futures contract, etc., you generally buy at the Ask..

When you sell, you sell at the Bid...

So in your example you would "Sell" or "Sell to Open" at .09 which is the Bid.

So, you will be paid 9$ for each contract you sell. Each contract is 100 shares so basically, .09 a share.

To close the position you would Buy or Buy to Cover. Or simply let the option expire worthless if it is out of the money at expiration.

But think about it...you're going to get $9 - Commission...on an option that is 80+ days out....not worth it


Like I said, people love to talk about Options. How great they are, how much money you can make, etc., etc. Especially the dolts on Fast Money on CNBC. But they always talk in gross terms, never in net terms.

If I were you, and you want to get started in options I would stick with either covered call writing or straddles\strangles.

A strangle is when you buy a Call and a Put at the same strike price. What you want is for the stock to move hard in one direction or the other. You're going to lose on one and make money on the other. The goal is to have the winner cover the loss of the loser and then some. But you have to be picky when you buy those.

A straddle is the same but and wider strike prices. So if a stock is at $50 you might buy a $52 Call and a $48 Put thus "straddling" the current price. It's cheaper than a strangle but I think harder to make money.

People fall in love with the fact they can pay a little money for an option contract and potentially make huge money. And you can. Very few are consistently good at it. Most lose a ton more than they win.

Use Options wisely. Buy a stock. If it goes up and you want to lock in some profit, write a Call. If you think the stock will tank cause the market is going down and don't want to sell, buy a Put. You have to recover the price of a Put though if the stock doesn't go down.

Always remember this...

When Buying an option you have to be right, right now. And depending on how out of the money the option is, you have to be right about 3 things..

1. The timing
2. The direction
3. The amount of the movement

So the inverse is true for writing..

You really need to get some books on Options to understand how they work. How time eats at the value of an option...
How volatility effects price...
What Delta is...

But please, if you do anything heed this little tidbit...

If you want to buy an option, buy several months out and close to the current price. Don't try to buy an option 5 points out of the money that expires in 3 weeks....

As a buyer, time is your enemy so you have to buy time...literally

If you want to Write options, write current month options. The closer an option gets to expiration, the faster the time value (Theta) comes out of the option. So use that to your advantage....

[Discuss Thrower]

Remember an option on an equity is the right but not obligation to exercise the option at that agreed upon strike price.

The value of an option depends on the market price of the underlying during the life of the option (Euro options can only be exercised at the contract expiry date, American can be exercised anytime).

Now, if you're buying an option you're buying that right but not obligation to exercise that contract and acquire the underlying security at the strike price.

Say it's Thursday and you have a call expiring on Friday. This call strike price is $110. If GE ends the day of trading above $110, then your option has value (ignoring commissions, of course) to either exercise the option and buy the stock at the strike price or just sell the option to another party. If it's trading below $110, then you $110 strike price option is worthless.

Basically, you are coming out ahead of a trader who thought GE would not exceed $110 a share on Friday.

If you have purchased a put with a $90 strike with the same expiry and underlying equity, then it's kind of the reverse. If GE closes above $90, your put has no value and presents no profit. If GE closes under $90, it has value and can be sold for a profit (or exercised). You are coming out ahead based on a Trader who thought GE would not go below $90 a share.

The value to you depends on this in generalized math: Strike Price - Stock Price = profit if you have purchased a call and Stock - Strike = profit if you have purchased a put

BUT if you're selling an option (you are writing an option) the dynamic is reversed. If you sell a $110 GE call and GE trades at $110 or more in the market, you have to pay the costs to fulfill the contract and provide GE stock to the option buyer and sell it to the option buyer at $110 even thought the stock is trading for potentially $150 in the market.

Writing a naked put at $90 and GE goes lower than $90, then you incur unlimited loss potential from fulfilling that contract.

Your only upside in writing a naked put is if the underlying stock doesn't fall below the strike price and your profit is capped at the premium you receive for selling that put.

[Nightfyre]

Writing a put does not create unlimited loss potential. Writing a call does.

[Discuss Thrower]

Originally Posted by Nightfyre

Writing a put does not create unlimited loss potential. Writing a call does.

https://www.optionseducation.org/str...naked_put.html

[Nightfyre]

Maximum loss of writing a put is 100 times the strike price, not unlimited. As it says in your link.

[Discuss Thrower]

Originally Posted by Nightfyre

Maximum loss of writing a put is 100 times the strike price, not unlimited. As it says in your link.

I wasn't paying attention and deleted my comment:

Yes, you are right. I flipped the loss potential of puts with calls.

[Hog's Gone Fishin]

10 Stocks to benefit from Tax Reform from JP Morgan

https://www.investopedia.com/news/jp...m_medium=email

[scho63]

Originally Posted by lewdog

Ok bud, I have covered calls down.

Now on to puts.

How did you buy a stock at $19ish and have it currently trading in the $17's but "made" money on it losing value? How do you short a stock you currently own and where does the money you make come from?

What do you mean when you say "I averaged down and the call premiums had no good value?"

Thanks for the help! I owe you a beer!

I began buying the stock at $19.94 and bought more down to $19.01 with a cost basis of $19.54.

I also after the last purchase of the stock bought 10 out of the money puts with a $18.00 strike for June 2018 cost of $1.22 each for a total of $1,246 w commission.

The stock has gone down since I purchased losing money in the short term and the puts have gone up slightly cutting my total loss on GE. I would need to sell the puts to recoup some of the losses in the stock. Right now all profits and losses are on paper.

The puts are independent of the stock.

Next time we meet I'll give you an in depth lesson BEFORE we drink....

[scho63]

Originally Posted by Nightfyre

Maximum loss of writing a put is 100 times the strike price, not unlimited. As it says in your link.

That's a confusing way to explain it so I'll expand your answer.

If you "write" a single PUT, it means you are giving someone the right to PUT the stock to you at a specified price before a specific time. These are called NAKED PUTS.

So if someone wrote a single put contract, which equals 100 shares of the underlying stock, for let's say $1.72 for the put contract on US Steel with a strike price of $30 and the expiration of April 20, 2018 you would collect $172 minus a small commission.

So now if the stock plummets and goes down to $25, someone who owns the put option you sold can sell the stock to you at $30 and you must pay $3,000 for a stock now only worth $2,500. You have an immediate loss of $500 - your put money of $172.

The most you could lose would be if US Steel went to $0 and you got forced to pay $3,000 for stock that is now zero and you would be out the $3,000 - $172 premium you collected when you wrote the option.

Remember one thing, the higher the stock price when writing a naked put the greater the dollar loss if it goes against you.

Some hedge funds and traders who want to buy a stock at a cheaper price if it is too high now, write a large amount of naked puts as a way to own a lot of stock on a decline while collecting the premium. If it doesn't go down, they still make money on the premium they collected. They will usually buy the puts underneath the ones they wrote so if the stock drops too much, they have some protection when there is a huge drop. This is called a STRADDLE

[Hog's Gone Fishin]

US Steel Raised to Buy From Neutral by Longbow Research



I actually bought moar at 32. The tax plan passing should give this a boost

Sitting at 34.46 right now


These Steel/ Metals/Mining stocks are doing well since the middle of November. opportunity here ??

NUE 2.43% Dividend

STLD 1.5% dividend

TX 3.21% Dividend

GGB 0.69% Dividend

SMSMY 2.48% Dividend

AKS 0Dividend