Last week I wrote about Call Options, and how to lose lots of money trading them. For a refresher on Call Options, read the article below first. http://oracle.davidkanter.com/2018/09/19/call-options-what-are-they-and-how-can-i-go-broke-trying-to-buy-and-sell-them/ This week I’m going to write about put options. A put option is a contract that gives the owner the right (but not the obligation) to sell a stock on or before a specific date in the future at a price that is mutually agreed upon by the buyer and seller. The price of the option itself is called the premium. The price of the stock the buyer and seller agree to in the future is called the strike price. The seller of the put is bullish and expects the price of the stock to go up so they can keep the premium, and the buyer of the put is bearish, because they expect the price of the stock to go below the strike price so they can sell the shares at a price above market in the future. Buying puts does not require owning the stock, but if the stock goes below the strike price and you have sold a put to someone, you could end up being the owner of that stock (and still keep your premium). This is called being assigned. I often sell puts if I’m thinking about buying a stock. If it doesn’t go low enough for me to get it, I’m not that disappointed because I still captured a premium. I did this with CRON a few weeks ago. On 9/13 I sold a $10.50 9/14 Put option for CRON for $20.00. (Yes, you read that right a 1 day put option). At the time of the trade on 9/13 it had a high of $11.37, however by the end of the trading day on 9/14 (the expiration date) it made a low of $9.26. I was obligated to buy it from the owner of the contract for $10.50, even though it was trading for $9.26. This was not good because I could have bought it on the open market myself for $9.26 had I not been in that contract. Am I concerned? No, I made $20.00 immediately, and I also turned around the next trading day and started using it as the underlying stock for my covered calls. For this I received something like a $60 premium. I’m still holding it today and it’s trading for $11.48 and I have sold a call at the 11$ strike price out to 10/5. Right now the buyer of my covered call is ITM (In the Money) because they have the right to buy the stock from me for $11.00, but the price of the stock on the open market is $11.48. I really don’t care if this happens because I paid $10.50 for the stock, and still make a profit of $0.50 per share. My risk is that the stock goes up to 100$ (just an example) and I don’t get to capitalize on that upside price action because the price increase way exceeds the premium I received. Conversely, the stock could go to $0, and I only get to keep my premium, which was much less than the price to buy 100 shares of CRON in the first place. I’m betting not much happens, or maybe it declines a bit and I just keep my premium, and buy a new covered call out a few weeks again and keep keeping the premium. If I end up selling it, I’m ok with that at this point too. Should there be dramatic price shifts I can also buy my way out of the contract, although chances are high that the price to buy my option back would be more than the premium I received. It’s all about managing risk here.
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