The question below is very confusing. I am not able to comprehend or read the question clearly. The explanation for the question isn’t helpful.
How do I know if it is a long put or a short put? How do I interpret the question?
Thanks!
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Fox,
Any time you “sell” a call or put, you are short the option contract. Whenever you buy an option, you are long the option contract.
So this investor is short 1 90 put, collected $2 premium, and will be obligated to purchase BCD if the stock falls to below $90 at expiration. The stock falls to $75 and the investor is assigned.
90-75= 15 ($1,500 loss at this point, but remember that you collected $200 premium)
15-2 = 13
13x100= 1,300 loss
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Ah! Thanks for the tip about sell or buy.
Thanks, Gray!
The math made sense.
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So, in this question, it was a short put. Expecting the market to go up. Am I correct in assuming that there is a loss because stock falls to $75?
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That is correct. When you sell a put, you are hoping the stock price rises. As the stock goes up, the value of that option contract goes down. You sold it for $200, and as the stock rises, and time goes by, the value of the option decreases. At this point the investor could purchase the 90 strike option back in order to close the position. Maybe some news drives the stock up the very next day. The option could now only be worth .75 cents ($75). In which case, the investor may “buy to close” the position. He originally sold it for $200, but then buys to close it at $75 making $125 profit.
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ok.
So if the questions talks about “selling” a call/put, It’s a bearish. Same goes for “buying” a call/put being a bullish?
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No, not exactly.
Think of it like this:
If you buy a put, you profit when the stock goes down.
If you sell a put, you profit when the stock goes up.
If you buy a call, you profit when the stock goes up.
If you sell a call, you profit when the stock goes down.
Basically, when you sell an options contract, you hope the option stay “out of the money” and expires worthless. You are the seller, and you collect the premium.
If you were an insurance company, you want everyone to pay you premium, but never actually need your services. You want to collect premium, but not have any claims against it.
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Thanks!
I think I got it.
Hopefully, I don’t get a lot of options questions on real exam. heh.
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As a buyer of an option, you want the option to go “in the money” as much as possible. You want it to go “deep” in the money. Ideally you want this to happen fast because when you pay premium, that premium only lasts so long (the option will expire eventually).
You buy car insurance every six months. Maybe the premium you pay Allstate is $250/six months. Once the six months are up, if you don’t pay again, that coverage will lapse.
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I think you’ll only have a few. Do you have a paper trading account on your trading platform? If not, I would recommend opening an account with TDAmeritrade and using Thinkorswim’s paper trading platform. Pull up the options chain, and play around with buying and selling options. Look for stocks with big intraday moves and watch the value of the contracts fluctuate.
Options can be really tricky, but fortunately for the SIE, you really only need to know the basics.
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Thank goodness.
I don’t have a paper trading account. I don’t think I have time to devote to learning about the options trade on TDAmeritrade. I am cranking up my practice review questions and gonna be taking couple practice exams today on Achievable.
Got an exam on Jan 8th. So will be practicing exams all week.
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