If you really want exposure to Amazon, but on less than 100 shares, just buy fewer shares or buy a call spread / sell a put spread.
You are using an out of date browser. It may not display this or other websites correctly.
You should upgrade or use an alternative browser.
You should upgrade or use an alternative browser.
Why options are for 100 shares? how to hedge for expensive stocks then?
- Thread starter basem0001
- Start date
If you really want exposure to Amazon, but on less than 100 shares, just buy fewer shares or buy a call spread / sell a put spread.
1: options are standardized. If it wasn't always 100 shares that would get complicated very quickly. It does happen though. For example, when stock splits occur. I don't know the history, but I suspect it's because the standard "lot" size on a stock was 100 shares.
2: Use an options as a form of leverage by creating a synthetic long stock position by buying the call and selling the put. It has the same profit/loss profile as long stock (although you'll likely have some slippage and extra commissions vs just buying the stock). Now that you have your synthetic long, you can then hedge as per normal by buying a put at whatever strike and expiration you wanted for your hedge.
3: Using call options by themselves (without simultaneously selling a put) would be another way to utilize options as a sort of leverage on owning the stock, although the profit/loss profile is not the same as the synthetic long stock and you have time working against you. In the synthetic long stock (buy a call and sell the put), the theta decay on the short put offsets the theta decay on the long call. If you just buy the call, then you only lose on theta decay.
Up to you to decide the right approach, but options can allow an investor who does not have enough cash to buy 100 shares of AMZN to still go long the stock and buy a put for protection, but bear in mind, it's still 100 shares being represented by the options, so those price movements will be wild. That kind of leverage is probably not appropriate for most.
Thank you so much Lee!
Thanks to you all
With regards to item 2, buying the OTM put as a hedge was intended to be combined with the synthetic long stock position (where synthetic long = buy atm call, sell atm put for example). The total position would be +1 call, -1 put, +1 put (where 1 put is equal in strike and expiration to the call and the other put is used as the OTM put hedge).
I don't see this as a case of over hedging if the OP wants to simulate owning 100 shares with a protective put, but I do think it's a case of over leveraging.
To provide a realistic example (I'm NOT recommending this and prices are roughly as I type this):
Synthetic long:
Buy to open 1 call option with 1540 strike expiration October 19th at a cost of $162/contract (total $162 * 100 = $16,200).
Sell to open 1 put option with 1535 strike expiration Octrober 19th at a cost of $139/contract (total $139 * 100 = $13,900).
Protective put:
Buy to open 1 put option with 1400 strike expiration October 19th at a cost of $81/contract ($81 * 100 = $8100).
Position would be:
+1 Oct 19th C1540
-1 Oct 19th P1540
+1 Oct 19th P1400
Total margin impact of $14k, so while I don't consider this a case of over hedging, I would classify it as a case of over leveraging.
View attachment 183977
Purchasing a synthetic (long) and a long put is cost ineffective. Replace the 3 legged position with one (a call option at the same strike / expiration as the long put) and save some commission.
Sell an OTM call strike if you want to mitigate some of the time decay in the long premium. This will morph the position into a vertical spread.
The long strike provides an in-built hedge.
@basem0001, I suggest you paper trade before you put your $$ at risk.
Purchasing a synthetic (long) and a long put is cost ineffective. Replace the 3 legged position with one (a call option at the same strike / expiration as the long put) and save some commission.
Sell an OTM call strike if you want to mitigate some of the time decay in the long premium. This will morph the position into a vertical spread.
The long strike provides an in-built hedge.
@basem0001, I suggest you paper trade before you put your $$ at risk.
Thanks for your input!
Yeah definitely I would try with paper trading first as I am new to options trading.
I think you missed the point about hedging? if I bought a call option only, I will be exposed to risk if the stock plunged?
Thanks for your input!
Yeah definitely I would try with paper trading first as I am new to options trading.
I think you missed the point about hedging? if I bought a call option only, I will be exposed to risk if the stock plunged?
"The long (call) strike provides an in-built hedge."
The above was the answer to your question. The most you can lose is the premium paid purchasing the option.
If you're long the stock, you're on risk all the way down to zero.
It would be worthwhile reading a few option books / online resources to help you understand the basics.