I originally bought DDD at 39.000... happy where it's at now. Understand volatility, but as a newbie bought a Mar 16 /13 $65 Put (happy to own at a reasonable price, when subtracting premium) and picked up $409.As of today (Monday) the stock has taken a nearly $7 dip (at this time $3.50 below the strike price).Two questions:1. Am I obligated to Sell to Close early, because it has gone below the strike price of $65, or can I wait it out to see what happens at expiration (in March)?2. Would it behoove me to Sell to Close, early, in order to take advantage of a price better than what I had anticipated (minus the premium). I would be happy with either and am covered financially to handle it.Thanks,Craig O.@Craigt1
If I undertand it, you have the right to sell 100 shares per contract for $65 on or before March 16.You are not obligated to anything. If you let it expire and assuming it has value, chances are your broker will use your margin account to buy the stock - if you don't own that many - then sell them and deposit the profit on your account.Or you can sell to close anytime before. Looking at the chart I would wait till we reach moving average around $55. Nice trade btw!
Thanks Jeff! Appreciate your quick reply. I feel more comfortable with this, now.So... If you don't mind answering another question -- I do want to add 100 shares of DDD, at the best time. Would it be appropriate for me to initiate a 60 day Limit, Buy to Close DDD at the moving average $55 -- and sit back and see what happens?
Hmm.. Where Jeff's come from? :) I am Luke.Anyway,first of all if you do own the amount of shares covering your put option and you let it expire the broker might sell your shares on March 16. (I am assuming you won't wait till then) but hypothetically at that point you will want to buy back your shares ASAP. because you don't want to be out of the stock as a long term investor (I am guessing you are a long term investor in this)So lets assume you just sell to close the option in the next few days taking your nice profit.And then you are looking for entry at the bottom. Now you called the top pretty well, you will have to call the bottom just as well. calling tops and bottoms is hard so don't get too carried away.Options are tricky. they have time value, volatility value. Best time to go long with call options is when the stock has been depressed for a long period of time (and we expect rebound). that way there is minimum volatility value in them. for example your put option must have been a good buy bc this stock is roaring up like a rocket, so no one thought it would drop. but exactly for that reason even if it drops there will be a lot of traders thinking it will go back up soon. and that is priced into the call options. if the stock price remains depressed for a long time this hope evaporates and the call option's price goes down.if the stock price goes down to $55 and you immediately buy you might pay for volatility. and if afterwards the stock remains around $55 for a month that volatility along with time value will decay. and your investment will shrink even though the stock price is not changing.so if you really want to buy shares this way in the future you have to set your future price target and do the math. e.g.: the January 2015 Calls will go for $10. You will buy them bc you believe the stock will be at least $65 in January 2015. So strike plus premium is your minimum target price and you have to firmly believe in it in order to trigger!also if you decide to play with options please check on events affecting the fundamentals. an earnings report can set a very different trend for 3-6 months out on a stock. you might not want to be a part of that.and lastly an advice: options are a great tool to lose all your invested capital in no time!
First Luke, my apologies for calling you Jeff (I was in another area, earlier and forgot where I was at). I appreciate all the time you put into your two previous explanations.But I'm still confused and may not have properly explained what I did (or what I am thinking). I'm new to Options and just got into MF Options, last month (I started with MF, a while back, with Stock Advisor—just buying small amounts of shares to get into it with what little I had to invest, at the time).I also may be in trouble, if what I thought was the case… isn’t.With options, my thought was that I would just buy Basic Puts (Sell to Open) to keep it simple, in the beginning.Presuming the Puts expired AT or BELOW the Strike Price, I would use cash, kept in escrow, to purchase the 100 shares from the buyers of the options that I wrote, and the buyers would exercise those options and sell their shares to me (1 contract each is what I’ve been buying) for the current lower price at expiration (less the Premium I received--held in abeyance in my savings account -- when I originally wrote each Sell to Open).If the shares, instead, ended up ABOVE the Strike Price, at expiration, my understanding is that the owners of the options would not exercise them. They'd let them expire and I would simply pocket or reinvest the Premium.Based on your last note to me, I may have underestimated the difficulty in the learning curve (or the process). Here’s where I stand with DDD (and, frankly, a few similar Sell to Open PUTs that I have written in the last month).Last Fall, I originally bought outright 14 shares of DDD @$39 (regret not buying more, but was all I could afford at the time). Since then, my wife and I came into a small amount of family trust money, so we thought we’d use the Basic Options strategy to pick up stocks, in which we would like to invest, at a lower price (or at the least pocket the Premiums if the Puts expired higher).So, over time, I wrote two separate Puts for DDD… each one at a different price (1 Contract each X 2 Puts – not Covered):The first was DDD Sell-to-Open May 18 ’13 $45 Put (where I picked up a $2 Premium or $189 after commission). The idea was that there was probably no way Strike would reach that level now that the Fiscal Cliff had settled down… and it would expire, at a higher share price, leaving me with the Premium in the bank. But if it does hit at or below $45 Strike, I’m prepared to purchase the 100 shares from the buyers, around expiration time -- if I understand the process correctly.Now – this is the contract that I was asking about earlier:A week later, the second Put I bought was the DDD Sell-to-Open March 16 ’13 $65 Put (where I picked up a $4.20 Premium or $409 after commission). The idea was that the potential for the Strike to hit would be more plausible—considering where shares were and we would still get the contract at less than what shares had been selling for, at the time, before expiration date (if at or below Strike)... or, I'd just accept the Premium at expiration, if not.Where I’m now truly confused…. With DDD shares ALREADY selling way below Strike (7 weeks prior to expiration), I don’t understand the process for Selling to Close EARLY below the $65 Strike price. And I am prepared, financially, to purchase the buyers shares back at the (now current $59 or so price).Would the buyers be willing to close early? And what language would I use in the Sell to Close order (I’m with E-Trade). The problem I seem to run into, when I click “Trade” on that particular Put Order, the earliest I can execute a Sell-to-Close order is February 13th (not tomorrow or this week).So, how would I purchase back the contract, from the buyers, at the below Strike price tomorrow, for example? Is that even possible? Am I even using the correct process, here, or am I just totally confused? I am willing to wait each contract period out, but I thought this one DDD, in particular, needed some attention.If you’ve read this far without giving up, I really appreciate your patience and perseverance ?I have a few other Puts that I wrote, this week (some where I expect Strike to go below, and others where I believe Strike will be close or above, but won’t sweat it if I can’t pick up extra shares to round out what I have bought already). Am I heading in the right direction, or am I really in trouble, here?For example:WPRT Jul 20 ’13 $28 Put (1) @$4.10GME Apr 20 ’13 $21 Put (1) @1.32GE Sep 21 ’13 $23 Put (1) @1.99Thanks for your time,Craig
You seem to be a little confused. You keep saying that you *bought* puts, but then you clarify that you used a Sell-to-Open order and received a premium:"my thought was that I would just buy Basic Puts (Sell to Open)"This is opening a position by *selling* puts, and is a bet that the stock will either go up or only dip slightly below your strike price at expiration. This is a great way to pick up shares at a discount (because of the premium received), but it has it's risks: 1. The stock could be significantly below your strike price at expiration, and you end up being forced to buy at a price much higher than market value, and 2. The stock is significantly above your strike price at expiration when you intended to pick up shares - sure, you get to keep your premium, but the stock ran away from you in the meantime, and you would have been much better off just buying shares.The operation to close your position, if that's what you want to do, is called "Buy-to-Close" puts with the same strike price and expiration as the ones you wrote. This would not be forcing the people who bought the contracts you wrote to exercise early - that's not possible. You're just making a trade that cancels out your previous trade.
"...The operation to close your position, if that's what you want to do, is called "Buy-to-Close" puts with the same strike price and expiration as the ones you wrote. This would not be forcing the people who bought the contracts you wrote to exercise early - that's not possible. You're just making a trade that cancels out your previous trade."Cornellengr2008,Thank you for clarifying the "language" for a Buy-to-Close. I'm still learning the vocabulary and had misinterpreted that aspect... did not realize the B2C Strike price had to be the same or relatively close (not way below, as DDD is today). I feel much more comfortable with it, now, and will chalk this up to "lesson learned".It appears my position with DDD is "safe" for now -- presuming it heads back up, closer to Strike in the next 7 weeks. If I'm forced to buy "higher than market", I still feel DDD will ultimately rise in the long term. In the meantime, I can still just purchase shares at the much lower (than Strike) price, today, and wait to see what happens with the Put, at expiration. I'm ultimately long on DDD, and do not want to be out of the stock.Appreciate your time. Thanks so much.
cornellengr2008 says it right. I think you got selling and buying puts mixed up. its a very big difference! Since you got the terminology confused I don't understand exactly what positions you are holding.If you sell (write) put options you are obligated to buy the shares at the strike price. if you wrote March $65 puts and the stock is trading at $50 on march 16 you will have to buy the shares for $65. If you don't have the money but you have other equity the broker can liquidate your other positions to satisfy your obligation. Alternatively you can close this position by buying back the put option. But since the option trades at $9 dollars now you lose a few hundred dollars per contract.If you ask me I think DDD will tank in the next few days, build a bottom around $50, and it will take at least two months for it to get back to the $65-$70 level. Its hard to judge what's the best move for you. If you buy even higher than the market price and you keep it for a long run you can only win, just not that much. if you buy the option back to close you will definitely lose on the contract.Options are for people who feel very confident in timing the stock price. You have to be absolutely convinced that the stock will trade around the strike your picked at expiration. If you are not that certain you are much better off simply buying the shares.
Thanks again, Luke, to you and to Cornellengr2008 for your sage advice. I do have a much better understanding of the process, and feel more comfortable with what I've done, so far.I also am aware of the risks and am prepared to handle what may come. But I would not have understood the process, as well, without the kindness of you both.BTW, I also spent some time, today, learning about Simple Moving Averages SMA's and Exponential MA's (and how to focus on each to help determine long and short positions). And I found a terrific FREE site that charts my entire portfolio (and even charts Watch Lists) with the ability to modify the periods to your own liking (or to standard periods), all in one place. You are probably aware of it, already, but for those who stumble upon this thread... it can be found at:http://www.freestockcharts.comMost brokerage services, like E-Trade, provide these charts... but you must search individually and click on each Stock Ticker to use them. FreeStockCharts.com lets you compile your holdings (and Watch Lists) all on one page. Of course, one can also upgrade to the monthly or annual fee (to avoid the advertising and/or to receive more comprehensive charting, etc.)
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