Also one scenario happened to me was my option trade ended up exactly at strike, I lost money. Near expiration it was going in and out of money. I didn't close my position.
Put Options Newbie Question- Before Taking Risk
- Thread starter Supermariotx
- Start date
You could easily lose far more than the cost of the puts. But you'd have to be pretty careless for it to happen. Lets say your puts are (American style) "safely" OTM on expiration day and you go to Cancun or whatever. They aren't worth much so you decide not to close them out. Then the market drops big near the close. You have lots of puts and they go ITM at expiry, then with normal "auto-exercise" you will be short a load of stock. Since this will likely result in a margin call your broker will buy you in Monday at probably shitty prices. There could also be one of these big bounce days at the same time to really screw you.
Far fetched? Maybe, but I'm sure it has happened many times. Be careful!
Nobody is going to Cancun now.
For both puts and calls, if you buy them (=you’re long), you can't lose more than what you paid. Just close them before expiry (see above comment)
In your scenario, do consider volatility. When volatility is high, buying options becomes more expensive. Take a hard look at your break-even: it's not enough to be correct about market direction, you also have to be right about how much the market moves in that direction, AND timing of the move.
In otherwords, a naked SPY 240 March 31 Put should be sold prior to expiring for a lost of nearly 10K to avoid a bigger lost if the market decide to increase?
Naked option? You're buying, not selling, right?
Yes, correct. I just realized "naked" was used out of context in this example.
So to make sure my math is correct. If I do the following:
1. Purchase SPY 240 Puts March 31 @ $3.00/$300 per Contract.
2. 33 Contracts = $9,900, which gives me the option to sell for $240 on or before March 31st.
3. If equity is at or above the strike price at expiration, I'll loose the investment amount, however not more than the $9,900 initial investment.
4. If SPY is lets say 230, I'll gain $10.00 for each share= $10x3300= $33,000. Is this math correct or no?
1. Purchase SPY 240 Puts March 31 @ $3.00/$300 per Contract.
2. 33 Contracts = $9,900, which gives me the option to sell for $240 on or before March 31st.
3. If equity is at or above the strike price at expiration, I'll loose the investment amount, however not more than the $9,900 initial investment.
4. If SPY is lets say 230, I'll gain $10.00 for each share= $10x3300= $33,000. Is this math correct or no?
Thanks for clarifying.