Basic question about selling puts

[CXMelga]

Hello, can someone answer the following for me please.

If X is trading at $50 and I sell (write) a put at $40 with a 90 days expiry for a premium (per share) of $1 

The above numbers are just for illustration

After 45 days X is trading at $43 and I am worried it might hit the strick price before the option expires, can I sell the option (with 45 days left) on to get rid of my risk. I guess not as I would get getting paid twice to sell the same option?

So I guess I could buy a put on X to hedge my position to a degree (depending on the strike pruce and duration). Or do a virtical spread (sell/buy) at the outset,  to hedge but make less potential profit at the end

Can someone please clear this up for me as I am learning before thinking about trading

Thanks very much

CXMelga

 

 

 

 

 

[Kim]

Since your position is short put, to close it you will have to buy back that put.

[CXMelga]

 

Hello Kim,

Thanks once again for taking the time to answer my question for me 

One last question related to the above please, when you say "you will have to buy back that put" lets say the position is open in my trading screen (as the option still has time to live and it has not been exercised) so I can select that particular position,  I presume I have to select something like 'buy to open' ? (still working in understanding the terminology). 

However will I actually be buying 'that particular put' as the owner (the actual person/entity who purchased the 'put' I sold in the first instance) may not want to sell their option.   In other words , as options trading is a  'market' I assume what actually happens is I will be 'buying a new contract' (from a writer) for a 'put contract' at the same strike price as the one I sold and for the remaining time to live (e.g. 45 days) to actually counter balance exactly the one I sold ?

or does it work some other way

Thanks again (I have just read one basic book on options trading and another is on its way with more detail, so sorry if my questions seem a bit dumb at this stage)

CXMelga

 

[Kim]

When you buy the option back (buy to close), you don't really care who is on the other side of the trade. It could be retail trader, it could be hedge fund, or it could be a market maker. If you offer price attractive enough (always use limit orders and start from the mid between the bid and the ask or even slightly lower), you will be filled.

[CXMelga]

Got it  

Thanks again Kim, 

CXMelga

[Crazy ayzo]

CXMelga,

I started 6 weeks ago and went through the same confusion on terms and technique.  Yes, on your trading screen if you click the " trade" link it should auto populate.  You want to select (Buy to Close).  I highly recommend using a limit price vs. Market.  Many of the options have wide spreads between "ask" price and "bid" price.  I've traded about 40 options in my first month.  I've found that if I set a limit price in the middle of the spread it gets filled almost immediately every time.  When I'm even more conservative and specify the far end of the buy/ask spread, I've gotten filled more than half the time before the price shifts.  However,  couple of times it did get away from me.  When you really want out, Price=market is a beautiful thing.  I needed to buy to close NFLX, AMZN and FB this morning and I had 10 minutes between market open and being knocked out for a surgery.  I literally entered the order from the operating table!

 

Keep in mind, if you're in a loss position on an option, you can be buying it back at an amount considerably HIGHER than the delta in the underlying stock price. 

 

Selling a naked call means selling a call without owning the underlying stock or call spread.  It's very high risk.

 

Selling a naked put (what you described above) is also very high risk.  I learned by selling naked puts on  AMZN week before the market cratered.  Simply don't sell naked options until you're highly experienced... and then you won't do it because you know better!

 

If your considering selling a naked put or call, check out the incredibly reckless trade I made this week.  (you should be able to look up the historical price chart for the week I owned it.)  When AMZN went to 1490 in matter of days, I was down MANY multiples of the $4070 I collected when I sold it.  A further caution to selling a naked options, it will lock up a lot of cash as reserve.

 

 

Edited November 3, 2018 by Crazy ayzo
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