Quote:
Originally Posted by petegz28
A) You short a stock you own by selling it
B) If you want to short a stock you own without selling it then you buy puts that total more shares than you own. So if you own 500 shares and you want to short 500 shares then you need to buy 10 puts.
C) You buy a stock at 19 and then buy puts. Depending on the Puts you buy and how fast they gain in value, you could offset your 2 point loss and make more than 2 points on the Puts. That's tough going though.
There are 2 ways to use Puts effectively...
A) As a hedge on your current investment
B) To buy stock you want at a cheaper price than today's value
Warren Buffet does this a lot. If he wants to buy a stock that's at $50 but he says, I will pay $47 then he will write a ton of $47 Puts. If the stock comes down he gets it at his $47 but it may be lower by then. He doesn't care cause he thinks $47 is a price he will eventually profit from. If the stock doesn't go down or continues to go up, he pockets the premium and ladders up.
The 3rd and most unsuccessful way to make money on Puts is the same, most unsuccessful way to make money on Calls. Buy them outright and hope you're right about time and direction.
Buyers of options lose money 90% of the time. You got the guys who talk a lot on CNBC and what not about calendar spreads, credit spreads, condors, this, that and the other thing. And by the time you factor in the Bid\Ask along with commissions, you are making really dick on most of them.
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This is great. Makes total sense reading this. Thank you so much.
I think Buffet's choice to sell a put on a stock you want to purchase anyway could be greatly used without having a ton of risk. Lowers your net cost of the shares as well if the purchase goes through from what I can tell? The rest of the options you mention seem pretty risky. Was reading about short selling where you in a sense borrow shares and later have to buy them back. Read some horror stories on investors losing their shirts on that!
Thanks Pete.