"Cancelling out" a put or call? Shorting a stock and writing a put = free money?

[Mashed]

Hi there, a few noob questions here.

Say I write a call that has a $4 premium. Does $400 land in my account right away and does some sort of position show up on my account indicating that I may have to buy a stock at a certain price for someone else? Does this position show pnl?

Also how can I "cancel" this contract - or is it impossible, and i just have to figure out a way to just hedge the option that I wrote?

Also if I short a stock (-100) and write one put that gets eventually exercised should my position be net 0 units afterwards?

Also super confused on the margin requirement for naked options, my broker doesn't give a real example and the people on the phone aren't allowed to give examples and seem just as confused as this as I am on terminology directly on the site:

100%* option market value + maximum (((30%* underlying market value) - out of the money amount), 10%* underlying market value, $250* number of contracts).

THANK YOU.

 

[JSOP]

Hi there, a few noob questions here.

Say I write a call that has a $4 premium. Does $400 land in my account right away and does some sort of position show up on my account indicating that I may have to buy a stock at a certain price for someone else? Does this position show pnl?

Yes the $400 lands in your account right away and you will see a short position for that call but you will NOT see a position indicating that you have to buy the stock later because option is a right NOT an obligation. And yes the position of the call option does show pnl depending on how the underlying stock moves and how the option reacts to the move of the underlying stock.

Also how can I "cancel" this contract - or is it impossible, and i just have to figure out a way to just hedge the option that I wrote?

There is no way to "cancel" this contract unless you cancelled the order before it got executed just like any other transactions that you do in your life. If you bought a real estate property, you cannot cancel the contract later lest for some very specific reasons. Option contracts are the same thing. The only way to "cancel" this contract is to buy it back, maybe at a profit or at a loss. Yes, you can certainly figure out a way to hedge the option if you want, but they may or may not be effective.

Also if I short a stock (-100) and write one put that gets eventually exercised should my position be net 0 units afterwards?

Yes your position will be net 0 units afterwards IF the puts get exercised which they might not. Exercising of a put is NOT an eventuality. It may not happen.

Also super confused on the margin requirement for naked options, my broker doesn't give a real example and the people on the phone aren't allowed to give examples and seem just as confused as this as I am on terminology directly on the site:

100%* option market value + maximum (((30%* underlying market value) - out of the money amount), 10%* underlying market value, $250* number of contracts).

THANK YOU.

Do the math! It's not difficult. Underlying means the stock that the option is based on. If you can't even do the math to figure out the margin requirement, you shouldn't be trading options, let alone naked ones.

 

[BlueWaterSailor]

Yes the $400 lands in your account right away and you will see a short position for that call but you will NOT see a position indicating that you have to buy the stock later because option is a right NOT an obligation.

While I agree with much of what you say, this part is incorrect. An options contract defines the obligation of the party that writes it; the party that purchases that contract gets the right to invoke that obligation. Rights are inevitably coupled with obligations, and one cannot exist without the other.

 

[destriero]

Hi there, a few noob questions here.

Say I write a call that has a $4 premium. Does $400 land in my account right away and does some sort of position show up on my account indicating that I may have to buy a stock at a certain price for someone else? Does this position show pnl?

Also how can I "cancel" this contract - or is it impossible, and i just have to figure out a way to just hedge the option that I wrote?

Also if I short a stock (-100) and write one put that gets eventually exercised should my position be net 0 units afterwards?

Also super confused on the margin requirement for naked options, my broker doesn't give a real example and the people on the phone aren't allowed to give examples and seem just as confused as this as I am on terminology directly on the site:

100%* option market value + maximum (((30%* underlying market value) - out of the money amount), 10%* underlying market value, $250* number of contracts).

THANK YOU.

The $400 credit is yours to keep unless you cover.

Cancel? No. Delta is the hedge ratio. It will always be less than 1.00 (1.00 = 100 shares).

The short stock and short put is equivalent to a short call. You can convert a call(put) to a put(call) with shares. It's termed the conversion mkt. You'll net to zero position at expiration if the short shares are trading below the put strike. You will be assigned on your put (resulting in long stock) offset by your natural shares. All gone.

Best not to short naked. Even with a buy write or naked put. Buy a garbage deep OTM call or put and you're in the vertical.

Say you're long XYZ from 50 and short the 55C. You're synthetically short the 55P. Buy say the 35P to limit your req to $2,000 less the net credit on that 35/55 vertical. Short the 55P for 7.5, long the 35P for 0.25 resulting in a req of $1,275 per contract.

 

[JSOP]

While I agree with much of what you say, this part is incorrect. An options contract defines the obligation of the party that writes it; the party that purchases that contract gets the right to invoke that obligation. Rights are inevitably coupled with obligations, and one cannot exist without the other.

In general, option is still a right not an obligation, for the purchaser of an option contract that is. I should've been more specific in my statement. When you own the option, it does not obligate you to do anything that is specified in the option contract but it does give you the right to do so. But for the party who wrote an option contract, yes he/she does have an obligation, a potential obligation to fulfill the right defined in the option contract whenever that is exercised by the purchaser of an option.

For my answer, I should've been actually more specific as well. His question was " does some sort of position show up on my account indicating that I may have to buy a stock at a certain price for someone else?" He is shorting a call so a more precise answer is: his position indicates that he may have to sell the underlying stock at a certain price to someone else, not buy.

Hope this is more clear to @Mashed and you.

 

[BlueWaterSailor]

In general, option is still a right not an obligation, for the purchaser of an option contract that is.

Since there are two parties, it's always both. One can't exist without the other. But even more to the point, a contract comes into existence by being written; a buyer cannot create one - only a seller can. That is, you cannot create a right for yourself - someone must be willing to take on an obligation first.

(As the former Editor-in-Chief of a rather large media resource, I had to bone up on contract law when we got challenged on who owned the rights to that resource. It's been a number of years, but much of that stuff stuck with me. )

 

[Ethilaloth]

You can close the order when it is convenient for you, regardless of whether the price has reached Take Profit or Stop Loss. You can do everything as you like, because this is your freedom in the market.
And if you have any difficulties or delays, then you can bravely complain to your broker, because all this should be a rarity, not a constant problem.
In addition, if you see that you are not doing something, or there are some discrepancies in the calculations, then you should still practice your demo, so that you can better understand all this and you no longer have questions about what is happening in the market and your capital.

 

[Mashed]

Their demo doesn't allow writing options. My question was more technical than theoretical. Like if i wrote an option would it be on my open position and if I wanted to close it would i have to "buy" it back which would reduce my premium. Or am i stuck with that contract until it expires and if the trade is going against me I just have to hedge in other ways?

 

[Mashed]

Oh and the math... I tried doing it and it doesn't seem to work out properly... I keep getting I need more maintenance above the cost of the shares if the option were to be exercised... It doesn't make sense.

 

[cluckslave]

Here, the idea behind a short put is to make a profit from an increased stock price. This is done by collecting the premium related to the sale in a short put.