How do you buy a put option?
I don't remember seeing a section in Ameritrade or Scottrade that offers this. Do you have to go through a full service broker for this?
Seriously, if you need to ask, you probably should not be dabbling in derivatives.
July 9th, 2007 12:17pm
You have to fill out a special form to trade derivatives on Schwab, and for certain kinds of trades they require you to have enough cash on hand and good credit, I believe.
July 9th, 2007 12:18pm
With my brokerage, puts & calls require that you have a margin account. Perhaps you have a normal account and so you don't have the buttons?
There should be no problem buying options.
But writing them you need a guarantee that you can fulfil them, either by possessing the shares that are offered in the option, or by possessing the amount of money for which you offer to buy them.
July 9th, 2007 12:40pm
The problem with puts is there's no bottom to the amount of money you could lose.
If you're going to buy a put, put in a stop-loss sell order at the same time to protect yourself.
July 9th, 2007 12:43pm
I don't understand why this is risky except for the potential race condition that exists between exercise and buy.
When you buy a put option, you are buying the right to PUT a security in the future. I.E, you are buying the right to sell someone a security in the future at a price determined today.
If the price falls, you win. You win because you sell him the security at price X, and you buy it off the market at price Y, where X>Y.
If the price rises, you just let the option expire, so your loss is limited to the price of the original option.
Buying options generally restricts your downside to the price of the option. Selling, on the other hand, gives you guaranteed income (the price), but also all the exposure to the downside. That's how people lose their shirts.
July 9th, 2007 12:53pm
Are your options different from ours?
When you buy an option here, the worst that can happen is that it becomes worthless.
It is the writer of the option that takes the risk.
July 9th, 2007 12:53pm
I thought the risk was in writing options?
Just buying them, I thought all you could really lose is what you bought the option for?
and then you have issues around the differences between American and European Options.
With the former, you can exercise the option at any time during its life. The latter only allows you to exercise the option at maturity. While that seems like a small difference, depending on the volatility of the underlying asset's price, the difference can be huge.
July 9th, 2007 12:58pm
The main reason options are generally a bad idea, i because of leverage.
If you invest £1k in a stock, you stand to lose £1k.
However, £1k in options on the same stocks might give you the same exposure as if you owned say £100k of the same stock.
July 9th, 2007 1:00pm
As a private investor you can write put options on shares you already possess, and you feel they will go down.
Then you earn the sum of the option if you are right, and if you are wrong you have just sold your shares at a price you thought was about right (or to high).
July 9th, 2007 1:01pm
Thanks Tapiwa. Next time I don't want to know something else I'll be sure not to ask you again.
The problem is that too many people are tempted to sell options. 'Free money' right.
Also, if you do not exercise your option, it becomes worthless. However, if you had bought the underlying asset, you would still own the asset ... whatever it price might be.
July 9th, 2007 1:07pm
>Thanks Tapiwa. Next time I don't want to know something else I'll be sure not to ask you again.
Sounds like a Country and Western song -> "If your phone doesn't ring, its me."
July 9th, 2007 1:11pm