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januson

Help with Understanding Put Options

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Hello

 

This is a totally new concept for me and I'm a bit confused by a Put Option.

 

Scenario

Today I can buy a put option, called:

VWS8, Put, Dec-08, 730

 

The stockprice today is 425 - I know for 100% that the stockprice never will exceed 500 before December.

 

Is this a good Put buy? Please explain why/ why not together with calculations so I can grasp it :crap:

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Well, how much does the put cost? No one can tell you if this is a good purchase without knowing how much it cost. This is like me telling you that I purchased a boat today and ask if you think this was a good buy without telling you how much I paid for it.

 

A put option give you the option to sell the stock to someone at the strike price. 730 in this case. This means that you either have to own the stock or buy it so that you can sell it. If you don't own it, then you can go and buy it now for 425 and then sell it for 730. A good deal and quick $305 profit, right? Well not so fast. If it cost you more than $305 to purchase the put, say 310, then it means you are paying $310 for the option to make $305 profit, so you will lose $5. The only way to be profitable is if the difference between what you can buy the stock and the strike price of the option, is larger than what you pay for it. So, if the stock goes down more, then the difference will become larger than your put purchase price and you will make money. If the stock goes up, the difference will become smaller and you will lose money.

 

There are 1000's of websites explaining how options work. You will get much better explanations there.

 

I am curious though on how can you know 100% that the price will not go above $500 by December?

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Thank for replying.

 

The cost price is 2.4 , sorry that I didn't remember to post that.

 

Yes I know there a plenty of websites explaining options, but I need to ask and create scenarios to get a basic understanding. When I first have the basic understanding I accellerate like a rocket :) That's just the way my brain works!

 

I am curious though on how can you know 100% that the price will not go above $500 by December?

Yes good question... nothing is 100%, but this one is really a piece of cake, I know the stock -ofcause it's a guess, but a guess based upon statistics.

 

If the put option has December, does that mean that I have the whole month to do something?

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januson, you have given out far too much information ;)

if 730 is the strike it is deep in the money :confused: etc

With all this information - you would be better off donating the premium to charity and paper trading it.:)

In general though, you are better off selling premium than you are buying premium... just as over the long haul you are better off selling insurance than you are buying it...

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Hey ZDO

 

Yes it's only papertrading, actually it's a online game, thats running each year here in Denmark - but I've never shown any interest in it, besides from now.

 

I don't know if 730 is the strikeprice, I was hoping you could tell me what I need to know from VWS8, Put, Dec-08, 730 and Cost price 2.4

 

So you're telling me that a strikeprice is missing. I cannot see that anywhere on the website, strange... :confused: I'm feeling a bit stupid right now.

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