Skip to main content
Message Font: Serif | Sans-Serif
 
No. of Recommendations: 1
Let me give you some examples of what I mean.

Suppose I owned GOOG at the IPO, and when the stock ran to 200 I decided to reduce my risk. I might have sold a 220 strike call 6 months out for a substantial premium like $25 or so. I have altered my risk/return expectation in a way that made sense for me.

Let's suppose the buyer of the call was a speculator. Let's also say that both o fus remained in the position until expiration. At expiration, GOOG was at 400. My option is assigned, and I sell my GOOG at 220. Since I got $25 for the option, my proceeds are $245. Since the stock is at 400, I have "lost" $155 in opportunity cost. The buyer of the option made that money.

However, I had made a reasonable alteration of the risk/return profile of my Goog position. So did I really lose? Certainly, I didn't face financial ruin due to this loss.

If the price of Google went down instead of up, both the call buyer and you would have lost money. No? To show my ignorance I always thought that Delta and Gamma's were some of the prettiest girls on the Michigan campus.Now I find that I was wrong. Too complicated for me.Dr. Steve
Print the post  

Announcements

What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.