Buying back - written contracts

[Insurinator]

Quote from MTE:

You can buy it back (buy to close) at any time. There are no special requirements for it.

My only problem with this explination is it's too good to be true. Otherwise you could just write contracts all day and then when the price comes near your strike price you could just close the position out risking only your commission paid. Seeing as you don't pay anything to write contracts besides for the commission... there has to be other losses affiliated with closing the position.

Quote from nazzdack:

3) As a long or short, you always have the "option" of offsetting your open position or letting it expire worthless or letting it be automatically assigned or exercised.
4) As long as the option you are trading isn't locked at a price-limit, you can freely get into and out of a position. [/B]

What do you mean "locked at a price-limit"?

I know you can always offset a position, but I'm talking about "closing" written options... what type of loss would be associated besides for the commissions on the open and close of the trade?

You don't essentially pay anything to write a contract, you just tie the money up momentarily until the contract expires. If you closed it there would be nothing that you had "payed" to lose, but I know you have to lose more than commissions for doing this if it's possible.

Quote from tomk96:

i suggest reading this before you try trading with real money and lose everything. it is beyond my comprehension to think you could be exposed to unlimited risk and never think you could cover it.

http://www.amazon.com/Option-Volati...=sr_1_1?ie=UTF8&s=books&qid=1265684996&sr=8-1

That is why I am making this post. If you have the ability to simply close out a written contract position, that should dramatically reduce my risk. Writing contracts already has an extremely low amount of risk if you're not greedy and a moron. Sure if you get hit, you get hit real well. The trick is to not get hit and it can easily be done.

The risk is limited because everything has it's limits. A stock with legitimate options for trade isn't going to go anywhere infinitely. Just don't be stupid about buying a garbage stock's options.

Demo trading is completely different emotionally than real money trading, but I am up just over %60 in 6 months of trading. I have yet to come close to a loss. I only write contracts during low volitility conditions, way out of the money, and only for periods of 20 - 40 days. If the premium yield is good for those conditions I write the contract, if not I move onto the next.

No risk, no reward. Call it how you want it, you can easily lose all of your money buying contracts and stocks too, more easily I think than writing contracts. All strategies have their strengths and weaknesses, it's how you exploit them.

 

[tomk96]

That is why I am making this post. If you have the ability to simply close out a written contract position, that should dramatically reduce my risk. Writing contracts already has an extremely low amount of risk if you're not greedy and a moron. Sure if you get hit, you get hit real well. The trick is to not get hit and it can easily be done.

The risk is limited because everything has it's limits. A stock with legitimate options for trade isn't going to go anywhere infinitely. Just don't be stupid about buying a garbage stock's options.

No risk, no reward. Call it how you want it, you can easily lose all of your money buying contracts and stocks too, more easily I think than writing contracts. All strategies have their strengths and weaknesses, it's how you exploit them.

you understand that if you sell an OTM option and the stock moves to the strike, the option price will increase. near expiration, you may not see the increase until it explodes. so if you sell a call and the market rallies, the call price goes up. you need to buy the call back at a higher price than you sold, thus losing money.

you may understand this, but some of your comments make me think you don't.

 

[Insurinator]

Quote from tomk96:

you understand that if you sell an OTM option and the stock moves to the strike, the option price will increase. near expiration, you may not see the increase until it explodes. so if you sell a call and the market rallies, the call price goes up. you need to buy the call back at a higher price than you sold, thus losing money.

you may understand this, but some of your comments make me think you don't.

This is exactly what I was not aware of. Thanks for clearing that up.

I did know the price of the option goes up when it reaches the strike. I was not aware that you actually choose to close written contract positions by buying the position back.

I knew you could "sell to close" a position that you bought but never knew visa versa when writing contracts. It was never specifically mentioned anywhere I read about trading options (only selling to close buys).

I always believed that when you wrote contracts you had to hold the position till expiration and let the stock run, and if it went beyond the strike you were exposed to having it automatically assigned regardless, with no option to stop the trade early.

 

[MTE]

Quote from Insurinator:

My only problem with this explination is it's too good to be true. Otherwise you could just write contracts all day and then when the price comes near your strike price you could just close the position out risking only your commission paid. Seeing as you don't pay anything to write contracts besides for the commission... there has to be other losses affiliated with closing the position...

It's not too good to be true. Just because you can buy it back doesn't mean you won't have a loss. You can buy it back at any time paying the market price and if you sold an option OTM and it moves to ATM then you will have a loss.

For example, let's say you sell-to-open an option at 3.00. Then the stock moves against you and your option is now worth 10.00. You can buy-to-close your option at 10.00. So you have a loss of 7.00.

 

[TraderSU]

Demo trading for months!!!! Now please spend 5-6 days in reading a decent options book. Options for rookie is one of the nice book. I liked the examples given in the book. Very simple to understand.

FYI. Selling options contract does require big margin/cash and usually done by professionals. Noob usually restrict their writing to covered-call or short-put.

 

[tomk96]

Quote from Insurinator:

This is exactly what I was not aware of. Thanks for clearing that up.

no prob. just please read a good option book before you ever consider selling an option with real money. large gap moves happen a lot more often than you think and there is nothing you can really do if it happens to you except to take you loss or trade out of it.

 

[Insurinator]

Quote from MTE:

It's not too good to be true. Just because you can buy it back doesn't mean you won't have a loss. You can buy it back at any time paying the market price and if you sold an option OTM and it moves to ATM then you will have a loss.

For example, let's say you sell-to-open an option at 3.00. Then the stock moves against you and your option is now worth 10.00. You can buy-to-close your option at 10.00. So you have a loss of 7.00.

It's good news to me, as I always thought you were never allowed to close a written contract position to begin with, hence my post. I always believed you had to let it expire or become assigned regardless of where the stock price was at.

Losses associated with writting calls are huge regardless but now I know they don't have to be as large as I expected.

 

[Builder17]

Quote from Insurinator:


Losses associated with writting calls are huge regardless but now I know they don't have to be as large as I expected.

this almost sounds like you expect it to be a losing trade...