Great post about options. If I could add anything it would be how to hedge your position.
In this market (especially around earnings season) stocks can be whipsawed like mad! I have seen blowout both directions, WTW had the best one day pop off earnings and JDSU was an amazing multi day run and CSCO, AKAM and many more were huge dogs.
If you had the calls in the dogs or puts in the winners you lost just about everything. The big boys usually just write a covered calls so they are hedged or they will write a covered call at a particular strike and then purchase the call a strike above the one they wrote.
What if you dont own hundreds of shares of an IBM or WTW or UA etc... (you get the point). What can you do to preserve capital in an option if it goes wrong?
Here is what you do:
Lets say I am bullish on Big Blue and believe it is going to be at 200 dollars by October? Currently it is trading at 164 and change. You can purchase the October 170 (or whatever you desire) for my example the 170 October is at 6.35 X 6.50 (and you could probably get it for 6.40). Lets keep it simple and say you bought 10 of them (your now in the 6400 bucks, if the stock gets hit for some reason or another and it drops to 150 that option is gonna be worth about 3 bucks and your gonna be down at least 3 grand. Now you can exit or hope (which hope is not a good principle to follow) and wait it out and wait for a bounce. Or you could have hedged yourself with insurance. This insurance is just buy a near term expiration put (lets say May). I like to go min 1 expiration further out of the money than the call (or put if you or playing the opposite trade than what I have given as an example). So lets buy the may 155 put, which is currently trading at 1.55 X 1.59. Lets say we picked them up at 1.57 (since we have 6400 into the calls we take at least 10% and roll that into the put). So we pick up the puts and our insurance is now 628 bucks. Lets say the stock moves up to where we believe its going 200 dollars (you sell the calls for approx- 30 bucks a pop or more (you just made a ton of dough and your only out 628 from the insurance). However, what happens if the trade goes the wrong way and Big Blue drops to 150? Well we bought the insurance. Those puts that we bought for 1.57 are now worth approx 17 dollars. So based on our calls were now out at least 3 grand but we had 4 puts * 100 *17 = 6800 dollars.. Wow we just made money :).
Usually the trade is somewhere in between this and maybe it drops to 155 dollars and that put is now worth 12 bucks so our total put is now worth 4800 dollars. (hope you get the point)
Sorry for it being long winded: This is just an example of how to preserve capital. Think of the put as insurance just like car insurance etc. Remember, you dont want to be down to the wire on an option thats very important. I used a wide range of expirations as an example most will be somewhere in between what I used.
Another strategy is to always be hedged into an Ultra 2X or 3X ETF. If you are loaded with multiple calls and dont want insurance on each call you pick up the call on SDS etc. take your pick there are many that you can use!
Hope that helps Im just trying to help and hopefully didnt confuse the hell out of everyone. I have learned this through experience and now any large position that I accrue in an option I hedge myself quickly. You never know when an accounting error creaps in ala-worldcom etc.. Or horrible news comes out or earnings suck.
Cheers
I dont think there is such a thing as "Smart Money." It seems more coined to get bag-holders than anything else?
