Protecting a short position with options

P

Paul Yeoh

Hi everyone

I'm a newcomer in this forum. This is my very first thread. Here is a problem I have:

I sell 100 shares of ABC Company short at $100. Also, I buy a 40 call option for $5 to protect against stock price going up
1. If the stock ends up at $110, what will be my overall gain/loss?
2. If the stock ends up at $50, what will be my overall gain/loss?
3. What is the most I can lose under this short sale-call option plan?
4. If I have an unprotected short sale position (no call option), what is the most I could lose?
5. Under the conditions described in (4), if I have a limit order to buy the stock and close out the position at $54, what is the most I could lose?

Kindly leave me your solution. Thanks a lot.
 
Quote from Paul Yeoh:

Hi everyone

I'm a newcomer in this forum. This is my very first thread. Here is a problem I have:

I sell 100 shares of ABC Company short at $100. Also, I buy a 40 call option for $5 to protect against stock price going up
1. If the stock ends up at $110, what will be my overall gain/loss?
2. If the stock ends up at $50, what will be my overall gain/loss?
3. What is the most I can lose under this short sale-call option plan?
4. If I have an unprotected short sale position (no call option), what is the most I could lose?
5. Under the conditions described in (4), if I have a limit order to buy the stock and close out the position at $54, what is the most I could lose?

Kindly leave me your solution. Thanks a lot.
More...

You need to use better numbers - if the stock is at $100, it is impossible for the 40 call to only cost $500.

If the stock is at $100, it would be more common to also buy a Call in the 100 strike range for protection, not a 40 call.

JJacksET4
 
Quote from JJacksET4:

You need to use better numbers - if the stock is at $100, it is impossible for the 40 call to only cost $500.

If the stock is at $100, it would be more common to also buy a Call in the 100 strike range for protection, not a 40 call.
More...
You need to join me over on the FANTX (the Fantasy Exchange) where anything is possible :D
 
Quote from Paul Yeoh:

Hi everyone

I'm a newcomer in this forum. This is my very first thread. Here is a problem I have:

I sell 100 shares of ABC Company short at $100. Also, I buy a 40 call option for $5 to protect against stock price going up
1. If the stock ends up at $110, what will be my overall gain/loss?
2. If the stock ends up at $50, what will be my overall gain/loss?
3. What is the most I can lose under this short sale-call option plan?
4. If I have an unprotected short sale position (no call option), what is the most I could lose?
5. Under the conditions described in (4), if I have a limit order to buy the stock and close out the position at $54, what is the most I could lose?

Kindly leave me your solution. Thanks a lot.
More...


Hi Paul,

Let me help U by rephrasing your above into more realistic terms & nos.:

Short Company at $100.

Buy 110 calls Jan 2011 for $5 to protect your position.


Then the answers to your questions will be:

Q1. Company reached 110 on Jan expiry your loss with be $15

Q2. Company drop to 50 on Jan expiry your profit with be $45

Q3. Under the above structured trade, your max Loses will be $15

Q4. Your theoretical loss will be infinitive if say stock go up to a trillion $ but actual practical loses is for you manage

( my planned loss can be 1-week ATR no. for a normal swing trade)

Q5. Your loses will be $100 – $54


All above nos is excluding commissions etc cost.

You must have a trade & a risk management plan in place before you go into the market.


Any more questions?

If you are Singapore, let meet.
 
Quote from tsaw:

Hi Paul,

Let me help U by rephrasing your above into more realistic terms & nos.:

Short Company at $100.

Buy 110 calls Jan 2011 for $5 to protect your position.


Then the answers to your questions will be:

Q1. Company reached 110 on Jan expiry your loss with be $15

Q2. Company drop to 50 on Jan expiry your profit with be $45

Q3. Under the above structured trade, your max Loses will be $15

Q4. Your theoretical loss will be infinitive if say stock go up to a trillion $ but actual practical loses is for you manage

( my planned loss can be 1-week ATR no. for a normal swing trade)

Q5. Your loses will be $100 – $54


All above nos is excluding commissions etc cost.

You must have a trade & a risk management plan in place before you go into the market.


Any more questions?

If you are Singapore, let meet.
More...



Correction for Q5 . Your PROFIT will be $100 - $54 = $46


.
 
You should read "beat the market" by Edward Thorpe for some ideas that expand on this as well if your interested. I know the name sounds really cheesy but its a good read.
 
Quote from Paul Yeoh:

Hi everyone

I'm a newcomer in this forum. This is my very first thread. Here is a problem I have:

I sell 100 shares of ABC Company short at $100. Also, I buy a 40 call option for $5 to protect against stock price going up
1. If the stock ends up at $110, what will be my overall gain/loss?
2. If the stock ends up at $50, what will be my overall gain/loss?
3. What is the most I can lose under this short sale-call option plan?
4. If I have an unprotected short sale position (no call option), what is the most I could lose?
5. Under the conditions described in (4), if I have a limit order to buy the stock and close out the position at $54, what is the most I could lose?

Kindly leave me your solution. Thanks a lot.
More...

You can try whatever you have in mind in the OL, use the Offline tab if you just want to play some hypothetical options, or compare two strategies.
 
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