Wednesday, November 18, 2009

Options Discussion

Comment below is from a blogger--and my commentary at the bottom.

After getting sick of losing money on winning trades by buying puts, I did a little research and have already talked to vision_invisible about this earlier. My most recent example of this type of trade was with CAT. I went short on it on the 9th, playing the double top setup. Since then, it has fallen as far as 58, but has bounced up since. The January 45 puts that I bought have done nothing but lose value... CAT is about .40 lower than when I initiated my short position, but I am down about 30-40% on my puts...nice. However, if I went short some calls, I would be up 30% now. Here is a rather large chart showing CAT, CAT put and CAT call values for example:
Great charts, they prove a valuable point. One thought though....going short calls is "selling calls". When selling calls, unless you have a mitigating risk strategy, you have unlimited risk. Say you wake up and find out that Buffet is buying CAT....and suddenly your entire account is worth about $.12. That can happen.

A big part of those moves that are shown in your chart are attributable to VIX, which plummeted in the last 10 days. So those movements are not "normal".....just saying. I didn't sell a single option until I had about 7000 hours experience in the market.

1 comment:

  1. Selling calls and puts can, indeed, kill you. I remember one time, I had taken a few thousand and sold puts and calls, back and forth, for the 10-years. Within a few weeks, I was up to 25 grand. A week later, I was lucky to get out with about 50 bucks in my account. It can turn on you fast.

    I stick to straight buying now. At least I know how much I can lose max!


Insightful and Useful Comment!