Financial Markets For The Rest Of Us|
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
learn that not all people lose money when stocks decline. In fact if one is correctly positioned with put options, a stock market crash may be music to his ears.
Sometimes when describing options, people use the terms favorable or unfavorable with regards to the underlying stock price move. For example, if the stock price moves favorably, the options will become profitable. This book is guilty of that as well. Now you may be able to see why. Like the old adage that "beauty is in the eye of the beholder", a favorable move is in the eye of the trader, in this case the option trader. Favorable does not necessarily mean up. It all depends on the style of the option. In other words, as a holder of put options, the worse the underlying stock's price does and the faster it does it, the more you can make in profits.
Writing (Selling) Options - The Short Part
So far in our discussion of call and put options we have been talking about buying them . In other words going long. I am sure somewhere along the way you asked yourself, who are we actually buying options from? In other words who originates the options to be sold? The answer is you are. By you, I mean average option traders like you and me, as well as institutions that issue options as a way of hedging (we will cover hedging a bit later). But what about OCC (Options Clearing Corporation) which we referred to at the beginning of this chapter? Well, OCC is a clearing house. It issues the symbols, terms, and styles of the options. It does not, however, create them or sell them. Traders do that and it is known as writing options. And by doing that they enter into a short position. …
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