Using puts to protect a position

[wxytrader]

BITO price: $17.70
1000 shares

Scenario #1

Contracts: 10
Strike price:12
Price: .65 (bid is .32)
Cost: $650

At expiry

Future stock price: $12
Future option price: .13
Value: $130

That's brutal! You lost 5k on the long position, and lost -$520 on the puts.


Scenario #2

If I compare to buying atm...

Contracts: 10
Strike price:17.50
Price: 4.50
Cost: $4500


At expiry

Future stock price: $12
Future option price: 5.50
Value: $5500


Equally brutal! You lost 5k on the stock position, and made 1k on the puts...but you risked losing $4500.

 

[MarkBrown]

sell stock get cash - sell naked calls - use premium to roll when necessary - stop when you own the world.

 

[wxytrader]

sell stock get cash - sell naked calls - use premium to roll when necessary - stop when you own the world.

Why can't I just short 999 shares so it's not boxing?

 

[BlueWaterSailor]

OCT BITO 20 last traded at 3.18. Rounding up:

Stock: 17.70
Strike: 20
Price: 3.20
Cost: 3200

At expiry:
Future stock price: $12
Future option price: 8.00
Value: 8000

Stock PnL: -5700
Option PnL: +8000 - 3200 = 4800
Total: -900 (max loss)

This assumes you don't do rational things like selling call spreads (which will be protected by your married put), or get out of the trade early when you see it going against you.

 

[wxytrader]

OCT BITO 20 last traded at 3.18. Rounding up:

Stock: 17.70
Strike: 20
Price: 3.20
Cost: 3200

At expiry:
Future stock price: $12
Future option price: 8.00
Value: 8000

Stock PnL: -5700
Option PnL: +8000 - 3200 = 4800
Total: -900 (max loss)

This assumes you don't do rational things like selling call spreads (which will be protected by your married put), or get out of the trade early when you see it going against you.

Yes one must avoid paying extrinsic value at all costs....but I'm looking at the DEC20 expiry... Maybe getting one month out and rolling would be better.

 

[taowave]

Why on earth are you comparing a deep call to an ATM,and drawing conclusions from a worst case scenario..

Not only that,but as usual,your math is wrong..

You really need to read a basic book on options..

BITO price: $17.70
1000 shares

Scenario #1

Contracts: 10
Strike price:12
Price: .65 (bid is .32)
Cost: $650

At expiry

Future stock price: $12
Future option price: .13
Value: $130

That's brutal! You lost 5k on the long position, and lost -$520 on the puts.


Scenario #2

If I compare to buying atm...

Contracts: 10
Strike price:17.50
Price: 4.50
Cost: $4500


At expiry

Future stock price: $12
Future option price: 5.50
Value: $5500


Equally brutal! You lost 5k on the stock position, and made 1k on the puts...but you risked losing $4500.

 

[mervyn]

my rule of thumb, unless the unrealized profit is already 2x or more, there is nothing to protect, predicated on don't buy the downtrend stocks.

 

[MarkBrown]

my rule of thumb, unless the unrealized profit is already 2x or more, there is nothing to protect, predicated on don't buy the downtrend stocks.

so true

 

[Handle123]

I use options in Futures when am expecting pullback of the futures, when I add onto long term futures position, liquidate hedging open profits and put on hedge when adding more in direction of long term trend.