quote:
Buying the right to buy at a certain strike price. Selling the right for someone to sell to you at a certain strike price. Without owning the security. Called being blind, or being naked in the trade.

Blind and naked derivatives trading. Level IV for those that care.

It got all the Libtards upset after the last financial crisis we had. They trade blind and naked, but didn't have the capital to cover when they were called.

Somewhat like selling short. Better be able to cover, and cover in a hurry if it goes the wrong way.

In the SLV example I cited, your worst case scenario is that the call you purchase expires worthless, and the put you sell gets exercised, obligated you to buy 100 shares of SLV, at $20.00 per share, no matter what it is actually trading at. Also in the example I gave, after you buy/sell, you get paid. The selling price of the put you sold is greater than the cost of the call you purchased.

I do it all the time. Mostly always with a security that has predictable swings, such as paper silver. SLV. PSLV actually can back what they claim to own. I highly doubt SLV owns that much silver. I won't bore you further with the reasons, which are all public already anyway.

Thank you for the explanation.

My investment strategy is a little simpler: buy low, sell high.

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Posted by Iowa Golfer

Heaven

Member since Dec 2013

10232 posts

Posted on 12/11/13 at 10:42 am to LSURussian

Options are pretty simple. Start by just buying calls and puts. You are buying the right (but not the obligation) to either buy, or sell, at a set price, on a set date. Consequently, your only risk is the price you pay for the option. That's it.

So if you bought a 1/2016 call on SLV at a $20 strike price, it would cost you $325 per contract. Each contract controls 100 shares. You'd need silver to get above $23.25, by 1/15/2016. A good way to go long, without laying out the funds needed to buy the shares.

Keep in mind, the break even of $23.23 is in theory. SLV could be trading at $22.00, and your call could be worth $4.50, or $450.00. Time premium. It works both ways.

Or if you own the shares, you can sell the right to buy to someone (covered call) as insurance, or buy the right to sell (covered call) as in each case you own the actual shares.

I sell a lot of covered calls.

As an example I bought 3500 shares of PAL, and immediate sold 35 $1 strike price covered calls. Someone paid me $200.00 to buy these from me. It reduces my cost basis in the security. The only danger is that PAL goes to $7, and I have to sell at $1. Selling at $1 is still profitable for me, and I need to feel the pain of not being able to sell at a higher price.

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