Sunday, September 12, 2010 5:16:52 PM
Here's my premise: If I was to go out to the March 19th, 2011 date (6 months to see where this thing goes?), and buy puts with a strike price of $26, the premium is in the neighborhood of $2.75 per contract. Based on a 5000 share portfolio, I would need 50 contracts; price $13,750? Now, my questions and likely error laden understandings:
1. Do I start this process by "buying to open"?
2. Let's say the CAFC spanks us sometime between now and before March 19, and the price drops to $16. I have the option of selling my shares at approximately $23.25 based on my strike prices of $26 - the $2.75 premium). How do I do that? Am I buying to close or selling to close? I haven't found a clear explanation of this end of the process. My $13,750 premium is a sunk cost, right?
3. If on March 19, 2011, the share price is still $26 or more, I simply let the "contract expire" lose my $13,750 premium and can do as I please with my shares.
4. If we emerge from this event a victor and the prices rises to $40 per share (same as #3 situation, I guess), I simply let the option expire, lose my $13,750 premium and do as I please with my shares I assume? I could sell my shares on January 15 at $40 and simply do nothing with the put option?
5. I don't want to think about spendin $13,750 and the court has made no decision by March 19th.
Any lessons anyone can provide that assist me in avoiding an ugly option debacle are most appreciated. Thanks a bunch.
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