why does going long always mean the investor is hoping for a price increase?

[Kruser6]

As some of you know I am studying for my series 7 brokers license. I am a little confused in the options chapter. When it gets into talking about hedges it says going long means you are looking for the market price to increase. How ever earlier in the chapter it says that going long in a put you are speculating that the market will be decreasing in price while if you are short a put you are actually the seller and speculating that the market price will be the same or increase in which case you would earn your premium as the option expired.

Can someone explain this to me. Why is long ALWAYS looking for the market price to increase for hedges, but it states it differently earlier in the chapter?

Thanks.

 

[cubsfn4ever]

Going long simply means you are buying a position vs going short which is selling a position. Normally if you are long a position, eg a common stock, you obviously want it to go up in price. A put, however, is an option to sell a stock at a fixed price at a future date. If you buy a put that gives you the right to sell a stock for $40 per share in February, for example, the put would be worth very little (probably about 25 cents) if the stock were trading at $50 today. If next week, however, the stock dropped to $25, your put would be worth over $15 as you own the right to sell the stock for $40 per share and you could only get $25 in the market.

Thus, going long a put is essentially a bet that a stock will go down or a hedge which protects you if a stock you already own goes down.

Hope this helps. GL with you test.

 

[PercocetThreat]

Going long simply means you are buying a position vs going short which is selling a position. Normally if you are long a position, eg a common stock, you obviously want it to go up in price. A put, however, is an option to sell a stock at a fixed price at a future date. If you buy a put that gives you the right to sell a stock for $40 per share in February, for example, the put would be worth very little (probably about 25 cents) if the stock were trading at $50 today. If next week, however, the stock dropped to $25, your put would be worth over $15 as you own the right to sell the stock for $40 per share and you could only get $25 in the market.

Thus, going long a put is essentially a bet that a stock will go down or a hedge which protects you if a stock you already own goes down.

Hope this helps. GL with you test.

Exactly, buying a put is similar to shorting a stock in the sense that you make money on both if the stock price drops.

 

[SSI]

Buying options,,, puts defined risks on your position......

selling options,,, theoretically has unlimited risks......... much the same as shorting a stock or commodity outright....

 

[Kruser6]

If you're selling a put you don't have unlimited risk do you? Don't you just have the strike price to 0? If the strike price is 40, then aren't you just risking 4000(- your premium) If you sell a put you are in a short put position right? So your max gain is the premium and your max loss is the strike price to 0 minus the premium?

bare with me fellas, I'm sure you all remember what learning options was like the 1st time!

 

[SSI]

if you sell a PUT, you are theoretically in a Long position....... but yes technically your loss is to 0..... but you wouldnt want that......

dont forget the intrinzik time value on the options........ OTM options are worth nothing but this.......

i strongly advise you to not SELL options, until you absolutely know what your doing..... it should be last on your list........ its a great money maker but you cant mess around with it..........

i used to sell them and always buy them back, when they dropped by (50%) of what i sold them for....... ive seen Limit Up days and guys standing there with Puts, they had sold......... of course you can always get out but it will cost you.....

remember this,,,,,,,,,, buy options when Volatility is LOW.......... Sell Options when Volatility is HIGH....... this is something that you should know..

 

[SSI]

when you begin to SELL options for the first time,,,,,,, you should learn to sell COVERED calls and puts........ you know what Covered means, right?

dont sell naked options to begin with......... by doing this, you will limit your profits but also your risk.....

i consider selling covered options, a great safe way to make money......

of course, im an old chart reader and would do all this by reading the charts..

 

[Kruser6]

SSI - Thanks for the information. Remember, I am just starting the chapter on options so everthing is a bit confusing to me at the moment. I have no intention in selling options or anything anytime soon!

 

[SSI]

ok...

i taught myself all of this in the 90's............ someday ill return to it but i need to have the time, which i dont now.......

personal opinion........ buying options are a waste of money for the most part, something like (90%) expire worthless, this should tell you the seller is making the money.......... but of course, you can have 20 winning trades in a row, selling options..... then have one bad one and wipe it all out...

study all you can....... but the game changes bigtime, if and when your money is on the line.....

go into every trade with a Plan....... have your entry and exit strategy planned...... dont be greedy but the key to being profitable over the long term is: Letting your winners run and getting out of the losing trades quickly....... the best Loser is the big winner......

 

[Waz]

remember this,,,,,,,,,, buy options when Volatility is LOW.......... Sell Options when Volatility is HIGH....... this is something that you should know..

Can you explain this in further detail? Volatility increases the price of options, so why would you want to buy if volatility is low? Are you talking actual volatility or implied volatility?

 

[Kruser6]

I am also confused by this SSI qoute

-From my studies, this is the way I understood it;




When Volatility is low you want to be selling options because the prices are less likely to be move away from your strike price and even more importantly your breakeven point. This way you have a better chance for the stocks to not be exercised, thus leaving you with a greater % of your premium.

When it is high - the prices are more likely to move past your break even point and thus giving you a better chance to earn a larger profit. If the stock moves downward heavily because the market is highly volatility when you are long a call you are just going to lose your premium, but if you have shorted a call then your risk is much larger in a volatile market.



SSI - Could you please explain. Thanks.

 

[SSI]

yes, you guys got it backwards........ when volatility is high, the option prices will be much greater........ you want to sell then and collect the premium........ when option volatility is low the prices will be lower, thus making for a better buy.....

this is basic.....

 

[SSI]

i will say this...... selling options is only for the very advanced trader... i have done it extensively in the past............

sometime the thought of unlimited loss is hard to sleep with......... of course you can always get out of option positions, even on limit up or down days.......

try pricing both puts and calls in a fast moving market........ the prices become inflated for both......

the time to buy options is before the move, in low volatility times.... thats when you can pick up the bargains........

of course almost all my experience is in the commodity field........

im telling you, selling Covered calls and puts, is where some good solid money can be made........

 

[Hitman26]

"buying options are a waste of money for the most part, something like (90%) expire worthless"



90% of options don't expire worthless. This is not true. 50% exipre worthless because there is a call and a put on everything with the same strikes. If one call is in the money, that means the put isn't and vice versa. I don't understand how in the world you don't understand this concept. Go look at an option chain for the QQQQ and tell me at expiration how it's not a 50/50 ratio with any price on the third Friday of the month.

 

[Illini]

It's really very simple. If you buy a put, you want it to go up. For it to go up, the stock needs to go down. A put will move in the opposite direction of the stock. Therefore, if you are long in a put, you are really shorting the stock.

 

[SSI]

Hitman, you would be correct if there were the same amounts of "puts and calls" sold for each strike price but you know thats not the case........

think about what you just said....... if dec corn closes at 328 per bushel, at option exp day........ all calls under 325 will be in the money, all calls sold at 330 or above will be out of the money....... conversely all puts sold at 330 or higher will be in the money and all puts sold at 325 or lower will be out of the money and i can assure you that the number of options sold at these strike prices (ARE NOT EQUAL)....... you of all people should know this.......... so its incorrect to say its 50/50... if you think about it, you will realize this....

 

[Hitman26]

I was talking about options listed.

 

[Hitman26]

Please show me proof where 90% of every option sold expire worthless. Go look at an option chain for the qqqq and check out the open interest for each strike. I can promise you that way more than 10% are in the money and will be on the 3rd friday in January.

 

[Darwinian]

read natenburg's option pricing and volitality

to confuse the matter more..... puts and calls are the same thing (synthetics)

"sell the prem', live the dream!"