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Jase said: "Hello everyone, I have read over the boards on here, very interesting stuff. A lot of experienced and seasoned option traders with great advice (the reason I joined). I'm new to options, and have been studying it for the past month from recommended sites like 888options, investopedia, and the CBOE. I personally feel most comfortable with covered call writing at the moment, and get my feet wet with that before I start doing anything more complicated like verticals, butterflies, condors, etc. My question is very noobish I'm sure, but here it goes anyways (with papermoney first). I am registered for the TOS site. I want to write covered calls on stock I own (or soon will own with papermoney). But I want to buy the stock first and actually "own it" before I write the covered call. So, after I own the stock, I was looking for the "overwrite" option but I don't see it as one of their choices. Since, I already own the stock, I was told the correct term is "overwrite". How do I do the covered call then? Do I just sell the options and collect the premium and the rest will take care of itself if I somehow do get exercised? I will have the stock in my portfolio, so it's not like it's "naked". I will be doing a lot more research on this and thank you to anyone who helps me."

hasse_john@yahoo.com said: "Like any system, there are times that it would work. However, it is somewhat counterintuitive. The only reason to buy is if you believe a stock is going to go up. The only reason to write a covered call is if you think the stock (which you already own) is going to trade flat for awhile."

prohobo said: "[QUOTE=Jase;71133]Hello everyone, I have read over the boards on here, very interesting stuff. A lot of experienced and seasoned option traders with great advice (the reason I joined). I'm new to options, and have been studying it for the past month from recommended sites like 888options, investopedia, and the CBOE. I personally feel most comfortable with covered call writing at the moment, and get my feet wet with that before I start doing anything more complicated like verticals, butterflies, condors, etc. My question is very noobish I'm sure, but here it goes anyways (with papermoney first). I am registered for the TOS site. I want to write covered calls on stock I own (or soon will own with papermoney). But I want to buy the stock first and actually "own it" before I write the covered call. So, after I own the stock, I was looking for the "overwrite" option but I don't see it as one of their choices. Since, I already own the stock, I was told the correct term is "overwrite". How do I do the covered call then? Do I just sell the options and collect the premium and the rest will take care of itself if I somehow do get exercised? I will have the stock in my portfolio, so it's not like it's "naked". I will be doing a lot more research on this and thank you to anyone who helps me.[/QUOTE] Selling calls against stock come with many names: "Covered Calls" (calls are sold against the stock and therefore "covered" by the stock purchase) "Buy Writes" (Sometimes used as on bothsides of the trade - either buying the stock and writing the option OR buying the option and writing the stock. I have heard brokers for decades use this interchangeably (rightly or wrongly) synomous with Covered Calls. "Over Write" or "Call Writing" (Usually the stock is already owned and the calls are sold against an existing stock position). At the end of the day - it doesn't mater WHAT you call it. All you are doing is selling calls against a long stock position. The trick is not only picking stock direction, but picking the right strike to sell and for the best premo. There are several ways to aproach it, but no correct way. Some traders look for what is known as STATIC RETURN. This is simply the PREMIUM over parity (extrinsic value) (AKA: Juice, Time Value, Premium, etc.). Simply EVERYTHING over intrinsic value. This value is then divided by the stock price to get static return. If the stock were NOT to move the return value would be X% vs. the underlying price. Example: Stock XYZ is trading $101.00 The 100 level call is trading $9.00 The EXTRINSIC VALUE of the 100 call is $8. Since they are 1 dollar in-the-money (ITM). If you bought the stock at 101 and sold the call at 9. If the stock closed at 101 on expiration (unchanged from today). The static return would be 8% (8/101). If this was done for on an option that expires in 60 days (2 months). Your annualized model would be 48% annualized static return on the strategy. (8 * 6). This doesn't mean that you will get 48% return, the model is just measuring static return. Another way to look at it is that if the stock move up ANY AMOUNT your return is capped at 8% for that time perioud. Additionally you have a 8% downside buffer to break even. A easy way to look at it - selling the 100 level call for 9 is like pre-selling the stock at 109, after you just bought it for 101. A $8 profit - if the stock closes at 101 or higher. ----------------------- Some traders look for short term forecasts as to stock direction. Let's say your expectation was for the stock to move up to 110 in 2 months, which call would be best to sell based on your expectation. 95 Call for $12 100 Call for $9 105 Call for $7 110 Call for $5 The answer is simple: The 95 call is like selling stock at $107, the 100 call is like selling stock at 109, the 105 call is like selling stock at $112, the 110 call is like selling stock at $115. However - lets look at the premium levels. The 95 call only has $6 of premium (12-(101-95) or static return of 6% with NO upside potential. Max return of 6% The 100 call only has $8 of premium (9-(101-100) or static return of 8% with NO upside potential. Max return of 8% The 105 call is ALL premium $7 since it is out-of-the-money OTM a static return of 7%, but an upside delta return of an additional $4 (105-101). Net max return of $11 or 11%. The 110 call is ALL premium $5 since it is OTM a static return of 5%, but has an upside delta return of an additional $9 (110-101). Net max return of $14 or 14%. As you can see the 105 and 110 call have less premium than the ATM (at-the-money) 100 call ($8 of juice). However, since they are OTM they have the added benefit of not off-setting HARD DELTAS for several points - giving you a bigger return if you are RIGHT about direction. The 100 call is the safe bet - it gives you the biggest downside buffer and highest static return. If you want the added horse power of HARD DELTAS then the 105 or 110 call is the choice. As you can see it all depends what your expectations and perpensity for risk is. I hope this helps. Just buy the stock first and decide which call strike to sell. If you are paper trading - I would do 4 trades (like the above example) watch how they perform and watch them over the expiration cycle. Remember - if your calls are getting called away - your are MAKING money. It is a GOOD THING. Only fools who have covered-calls on do NOT want to be called. They haven't figured out the math yet. Believe me - I have heard even a couple of retail NOB brokers say - you don't want to be called away on covered calls you are just giving away upside. Then I remember why they are a broker and not a trader. (Other than tax purposes - you really do want to get called away - the earlier the better). Someone asked me recently why would you want your calls exercised EARLIER and your stock taken away before expiration. I said if you can't figure that one out you need to go back to Options 101 and read up on THETA. I don't mind helping - but at some point people need to do SOME homework. There is no such thing as a stupid question, unless you already know the answer! Hope this helps."

Jase said: "Thank you prohobo for the detailed example. That helps me understand this much better. I still have a long ways to go and a lot of studying to do. But I will have more questions in the future for sure. I appreciate your expertise and taking the time to answer my question. I was monitoring GE for the past 6 months with morningstar.com and I almost bought it a few days ago when it was trading around $26. I was wanting to write covered calls on them to cover any unexpected downward movements and plus I do believe the stock is undervalued and will go up in the near future. I also believe their earnings report is coming out this Friday and I believe it will be good news. I missed my opportunity on it, but I'll get in the game when I feel more comfortable. I'm still paper trading and practicing a few strategies. I did read somewhere that you want a strategy for downward, upward, and sideways movement. So, I want to really work on that so I feel prepared for anything that comes my way. I know it takes a lot of patience, discipline, and a good entry/exit strategy plan to be successful at this. That's why I'm doing as much homework as I can. If you have any other tips, feel free to add them to this post. Again thank you so much."

drdan said: "There are two ways of trading covered calls. The way Prohobo describes is the way I look at trading options. Gaining the most profit with the most protection, which is why I trade credit spreads, it just makes sense to me that way. The other way is the way that John suggested and that is coming from a long term stock type person wanting to make money while holding onto a stock that is not performing well. The way that John suggests is the way most stock players first get involved with options, because it is easy to understand and you really do not have to think about intrinsic value, extrinsic value, volatility, etc, etc. Your just looking at the extra money from selling a call. For example, you are holding onto a stock and for the next couple of months it appears that it may not be doing so well, it is staying flat, or only gaining slowly or even going down; to offset these losses you sell an out of the money call. You are looking only for the premium of selling the call to gain some money. Since you are out of the money and if you are right about the stock, the option will expire worthless and you will keep the premium. This offsets your losses by the amount of premium sold or increases your small gain by the amount of premium sold. If you are wrong about the stock and it does gain heavily, you may be called away from your stock at 100 shares per contract, but you will have gained more than a typical stock holder up to a certain point which is the strike Price plus premium. There is a transition phase when coming from stocks to options and Johns way is usually the way that most stock traders do it because it is easy to understand; however when you continue your learning you begin to discover what Prohobo is talking about and that you are leaving money on the table by not leveraging options correctly which is when you discover trades such as credit spreads, butterflies, iron condors, diagonal spreads, etc. However many people are enticed by the big money and big percentage gains of trading straight calls and puts :biggrin5: and thats also when most of them get into trouble as well :ciappa: @Prohobo excellent post!"

Jase said: "Thank you for your insight Dan. What you said makes total sense to me. I wish I could see it the way you and prohobo do. I still see it more from the "stock" side and not the option side of it yet. That will come around in due time and diligence with my studies. I have one question for you. When you are talking about credit spreads, are you referring to bear call spreads and bull put spreads? What is the avg. monthly ROI % for these type of strategies? I personally would be happy with 5% monthly ROI per month if I can find a strategy that can consistently do this. I don't care so much about the homeruns, because I do want that downside protection with my trades. Again thank you for your advice."

prohobo said: "[QUOTE=drdan;71219]There are two ways of trading covered calls. The way Prohobo describes is the way I look at trading options. Gaining the most profit with the most protection, which is why I trade credit spreads, it just makes sense to me that way. The other way is the way that John suggested and that is coming from a long term stock type person wanting to make money while holding onto a stock that is not performing well. The way that John suggests is the way most stock players first get involved with options, because it is easy to understand and you really do not have to think about intrinsic value, extrinsic value, volatility, etc, etc. Your just looking at the extra money from selling a call. For example, you are holding onto a stock and for the next couple of months it appears that it may not be doing so well, it is staying flat, or only gaining slowly or even going down; to offset these losses you sell an out of the money call. You are looking only for the premium of selling the call to gain some money. Since you are out of the money and if you are right about the stock, the option will expire worthless and you will keep the premium. This offsets your losses by the amount of premium sold or increases your small gain by the amount of premium sold. If you are wrong about the stock and it does gain heavily, you may be called away from your stock at 100 shares per contract, but you will have gained more than a typical stock holder up to a certain point which is the strike Price plus premium. There is a transition phase when coming from stocks to options and Johns way is usually the way that most stock traders do it because it is easy to understand; however when you continue your learning you begin to discover what Prohobo is talking about and that you are leaving money on the table by not leveraging options correctly which is when you discover trades such as credit spreads, butterflies, iron condors, diagonal spreads, etc. However many people are enticed by the big money and big percentage gains of trading straight calls and puts :biggrin5: and thats also when most of them get into trouble as well :ciappa: @Prohobo excellent post![/QUOTE] Thanks - I also like to use the insurance analogy - people understand that. It is great for explaining puts. I am sure someone will ask and when time affords we will write a long post with a step-by-step. I don't mind - it keeps me sharp. I hate the saying "Those that can't, teach!". I find that when I teach (use to consult) that I need to be very sharp on details - for two reasons. One people toss very odd questions at you (that you may not of thought before), second - I really believe that if you can't EXPLAIN it to where a novice can understand it - you yourself really don't know it well enough. Teaching is also about becoming wiser and really knowing the subject mater. However - I like when others do some heavy lifting too."

prohobo said: "[QUOTE=Jase;71222]Thank you for your insight Dan. What you said makes total sense to me. I wish I could see it the way you and prohobo do. I still see it more from the "stock" side and not the option side of it yet. That will come around in due time and diligence with my studies. I have one question for you. When you are talking about credit spreads, are you referring to bear call spreads and bull put spreads? What is the avg. monthly ROI % for these type of strategies? I personally would be happy with 5% monthly ROI per month if I can find a strategy that can consistently do this. I don't care so much about the homeruns, because I do want that downside protection with my trades. Again thank you for your advice.[/QUOTE] There is much confusion between credit and debit vs. bull and bear spreads. A credit or debit is not indicative of direction. While bull and bear ARE. This is a little advanced, but if you bare with me - hopefully this will shed some light on the situation. Market Makers view calls and puts as the exact same thing (based on synthetics). A call and put is just a measure of curvature. They have a symbiotic relationship. Let me explain this very cool relationship as to credit and debit vs. bull and bear spreads. Maybe you with get that spark! Example: Stock XYZ is trading for $50. You are bearish on the stock and believe it will call to $45 by expiration. You decide to use a spread to reduce risk and take advantage of your directional bias. 45 CALLS are $6 50 CALLS are $2 45 PUTS are $1 50 PUTS are $2 You decide to do a credit spread (BEAR) using calls. You sell the 45 call for $6 and purchase the 50 call for $2. The difference is $4. You receive a $4 credit. The max value of the spread (difference between strikes) is $5 (50-45), therefore your max risk is $1 (5-1). You recieve a credit for this transaction. But let's look at some details of this trade. First, are you net LONG or SHORT premium (extrinsic value or juice)? You are actually net LONG. Theta (time decay) will work against you. Let's do the math. The 45 call is ITM by $5 (Stock - strike). The call price is $6. So it has only $1 of extrinsic value. That means at expiration if the stock is at $50 the call will expire at it's intrinstic value $5. It will lose $1 of premo. The 50 call is ATM - it is ALL juice. If the stock closes at $50 at expiration, the call will equal $0. The spread, measured by extrinsic value, is acutally a DEBIT. You paid $1 in premium (Long $2 at the 50 line and Short $1 at the 45 line). The spread therefore relies on stock movement (DELTAS) to generate a profit. The break-even point is $49. The stock has to fall that $1 of premium to get you to break-even before you make money. A common misunderstanding is that a credit spread means you have brought in money, when acutally in the above case (while it IS a credit) you are actually paying JUICE or Premium of $1. ------------ But that doesn't explain how puts and calls are the same???? Let's look at the put spread. If you wanted a Debit (bear) spread, you would purchase the 50 puts for $2 and sell the 45 puts for $1. Thus paying a $1 debit. Again, the $1 debit is your maxium risk. The max profit is $4 (The difference between the strikes minus the debit paidt) ($5-$1). Since the 50 put strike is ATM it is all juice ($2) and the OTM 45 put is all juice as well ($1). You paid $1 debit for the position - again that debit is pure juice (extrinisic value). If the stock stays at $50 you lose a $1. The stock has to fall to capture that $1 of juice (to get you to break even) before you make a profit. Hopefully at this point a light is going off in your head. Wait - didn't you say the call spead had a max $4 profit too and also has $1 of long premium? Yeah - I sure did! Both these spreads have identical risk/reward graphs. They are both LONG the same amount of premium. They both have $1 of premium risk. The stocks break-even points are both at $49. The max profits are both $4. Notice you bought the 50 line (in both the call spread and put spread) and paid $2 of premium. Notice you sold the 45 line (in both the call spread and put spread) and collected only $1 of premium. The difference is the put spread (you OWN) increases in value as it moves down and hte call spread (you are SHORT) decreases in value as it moves down. It is the same difference as far as your P&L is concerned. What is the difference? To a Market Maker - nothing - they are the same. If I showed you a Profit & Loss graph of this position (both the calls CREDIT spread and the put DEBIT spread) you could not tell me which is which simply by looking at the P&L graph or greek risk profile. They are the same. Just like a Covered Call and Short Put are the same. :confused5: Many retail investors think that it is better to sell the credit call spread, rather than the debit put spread. Unless they are getting short-interest on capital (99% of retail do NOT) - then it is the same position - no difference. What i see - long gamma at 50 and short gamma at 45, it doesn't matter if it was calls, puts, or a synthetic that credit the position - the P&L is the same. This should give you something to chew on. Armed with this knowledge - let ME ask YOU some questions! Can you have a DEBIT spread and be SHORT extrinsic value (premium)? Can you create the two above example spreads a different way (using stock, calls, or puts)? hmmmm..... It's amazing that I have time for this...I use to get some serious coin for consulting and now I am posting this for free...(of course this is just basic option theory - not really consulting)....but I love to help people that are willing to help themselves. So...Answer my questions and I will pull back the curtain some more...."

Jase said: "Wow, thank you again prohobo for all the time you put into this. I'm copying and pasting what you said in a notebook and going over the vocabulary and the examples to see how well I understand it. I think I understand about 50% of it. At the moment the other 50% is a bit confusing to me, but I will work on it and get back to you on your questions... :) Thank you again..."

drdan said: "[QUOTE=Jase;71222]Thank you for your insight Dan. What you said makes total sense to me. I wish I could see it the way you and prohobo do. I still see it more from the "stock" side and not the option side of it yet. That will come around in due time and diligence with my studies. I have one question for you. When you are talking about credit spreads, are you referring to bear call spreads and bull put spreads? What is the avg. monthly ROI % for these type of strategies? I personally would be happy with 5% monthly ROI per month if I can find a strategy that can consistently do this. I don't care so much about the homeruns, because I do want that downside protection with my trades. Again thank you for your advice.[/QUOTE] Well that is a loaded question...:cool: The way I trade credit spreads is on the indices (some stocks) using OTM options making a conservative 5 to 15% Rate of Return per trade and holding between 2 and 6 weeks. Risking $450 gaining $50 about 10% ROR The example Prohobo gave is an ITM or ATM spread which you get very high percentage gains, using his calculations you would have about a 400% Rate of Return - risking $100 gaining $400 per contract if you are correct. Now you would think, what the hell, I should definitely be trading the way Prohobo suggests for the better gain, but it is a matter of how you look at risk. The ATM/ITM spreads have a high rate of return but the probability of success is much lower. Meaning you have to be right to make money. However if you are wrong the amount of capital risk is very low. The OTM spreads risk a lot more capital however they have a higher probability of a winning trade. The strategy I employ also uses supports and resistance as levels to trade below or above to also reduce the risk of a losing trade. So the simple answer to your question is - yes I use bear calls and bull puts to trade and I get 5 to 15% per trade. Now to give you a hint on Prohobos question just remember that selling a higher extrinsic value and buying a lower extrinsic value will give you a short extrinsic position (look at ITM options). Also do not be scared away by the complexity of all this. It truly is very simple, much of what Prohobo is talking about is excellent and gives a good foundation and understanding of what options truly are. I am very practical and although I have learned and understand the information he is providing I do not use it when I trade. I like things very simple and use a system that works for me. For example I understand that I can use a debit spread instead of a credit spread to trade and that I really should look at the cost difference between the two when placing my trades and always go with the trade that costs me the least to place. However when I actually was looking at the cost difference between trading a debit spread or a credit spread it rarely if ever was over $10 per contract and most of the time the cost difference was actually under $5... now it may be different today I have not looked at the difference in a couple of years I just trade my credit spreads. When I started I was only trading a couple of contracts so my commissions were more of an issue than figuring out which way to trade. I guess now that I trade around 10 contracts per trade I may consider going back to looking...naah I am comfortable with what I am doing...LOL."

Jase said: "Thank you again Dan for explaining to me your strategy. I find all this information very helpful as I want to learn as much as possible. I do also want to be comfortable with my trades and understand the ins and outs of them as well. I know the saying if you don't understand it, don't do it. So, I want to understand it before I start using real money. I guess I have another question for you again Dan. What would be the success rate for your strategy? Do you win 80%of the time or more on these trades? What would be the success rate for prohobo's strategy (if you know)? The way I'm thinking of it is like this. If anyone else wants to jump in to show me the math or correct anything I do wrong, feel free to do so. I'm here to learn and I might make mistakes, but I would like to learn from them. Example: If you are successful 80% of the time on your credit spread trades risking $450 to get $50 gained, wouldn't the one loss wipe out all profits gained? (so if you have 10 trades, and 8 of them gain you $50, you'd have a profit of $400, but if you have 2 losses of $450, you'd have -$900. You are in the hole -$500???) If you had a 90% success rate you'd break even according to my math. (9 winners x $50 = $450 profit) (1 loser - $450) I'm assuming you have some sort of stop loss somewhere in there where you won't lose the entire $450 to keep your losses at a minimum. Am I correct? I guess if you have any examples explaining this, I'd be happy to see it. I really like prohobo's strategy. Risk less capital for higher rewards. I would just play a numbers game I guess with that. If you can have a 50% success rate (maybe too high, I don't know, but I guess it's possible) You would profit rather nicely with the 4:1 ratio. If I did 5 trades winners and losers I'd still come out on top. ($4 x 5 = $20) - ($1 x 5 = $5) Net profit = $15 I'm sure it's very difficult to get 4:1 Risk/reward ratios, but if you can get 2:1 it would still be profitable with a 50% success rate. ( $2 x 5 = $10) - ( $1 x 5 = $5) Net profit = $5 If I'm doing any of this wrong or these are not good "real world" examples please let me know. I've never traded with real money yet, so I'm still naive to actual "real world case examples". Again thank you for your time everyone who has helped me. P.S. Prohobo I'm still working on your questions, I've read your post like 5x and understand maybe 75% of it now, just a few things I'm not quite getting yet. I'm still working on it though and will get back to you soon on those questions. :)"

drdan said: "Jase, This is where the art and luck of trading comes in; also your rules of money management. The losers I have I never let get to full loss, but otherwise you are correct in your assessment that one loss really puts a hit on your gains. As for the method that Prohobos discussed, you could be a really bad trader and lose 100% of the time or you could be an exceptional trader and win 80% of the time. It is a matter of how you put on the trade and how many times you are correct in the movement of the underlying stock or index. The one thing I like about spreads is that even if you are wrong you have a way to adjust out of the trade and move your price points, thus limiting your losses."

Jase said: "[QUOTE=prohobo;71251] Let's look at the put spread. If you wanted a Debit (bear) spread, you would purchase the 50 puts for $2 and sell the 45 puts for $1. Thus paying a $1 debit. Again, the $1 debit is your maxium risk. The max profit is $4 (The difference between the strikes minus the debit paidt) ($5-$1). Since the 50 put strike is ATM it is all juice ($2) and the OTM 45 put is all juice as well ($1). You paid $1 debit for the position - again that debit is pure juice (extrinisic value). If the stock stays at $50 you lose a $1. The stock has to fall to capture that $1 of juice (to get you to break even) before you make a profit. [/QUOTE] Ok, I have a question about the $45 put. Isn't it ITM? Because if you are selling a $45 put and the stock is at $50, you are $5 ITM am I right? So, you would receive a much higher premium than $1? Wouldn't you want to sell a $55 put for the $1 for this example or am I missing something?"

prohobo said: "[QUOTE=Jase;71272]Ok, I have a question about the $45 put. Isn't it ITM? Because if you are selling a $45 put and the stock is at $50, you are $5 ITM am I right? So, you would receive a much higher premium than $1? Wouldn't you want to sell a $55 put for the $1 for this example or am I missing something?[/QUOTE] No.... Thinking about it this way might help.... For calls (pretend it is like BUYING stock). If the stock is at 50, then the ability to BUY stock anywhere BELOW the current market price MEANS those options have INTRINSIC Value! Thus they are In-the-Money (ITM). The 45 call, the right to BUY stock is $5 BELOW the current market price. Thus it will have $5 of intrinsic value. For puts (pretend it is like SELLING stock). If the stock is at 50, then the ability to SELL stock anywhere ABOVE the current market price MEANS those options have INTRINSIC Value! THus they are In-the-Money (ITM). The 45 put, the right to SELL stock is $5 BELOW the current market price. You would NOT want to sell stock at 45 if it is trading 50 would you? Of course not - so it has NO INTRINSIC value - the option price is STRICTLY premium (or juice). They are OTM (out-of-the-money) On the other hand, the 55 put, the right to sell stock $5 ABOVE the current market price, has $5 intrinsic value. Simple rule - if the CALL is ITM then the put is OTM. If the put is ITM then the call is OTM. Hope that helps. Busy now - have to go..."

Jase said: "[QUOTE=prohobo;71251] Armed with this knowledge - let ME ask YOU some questions! Can you have a DEBIT spread and be SHORT extrinsic value (premium)? Can you create the two above example spreads a different way (using stock, calls, or puts)? [/QUOTE] Ok, I figured out your questions (I think). It took me awhile, but I finally figured it out I hope. It's almost like the exact opposite of the 4:1 risk reward ratio. Doing it the other way you would risk $400 to gain $100 in this scenario. This is the bullish spread I believe?? I will write up my examples now. XYZ stock is = $50 By taking your examples of stock prices and option premiums. I did the opposite of what you did. This would be a bullish credit spread right?? Buy 45 call for $6 Sell 50 call for $2 If stock moves up to $55 your profit would be $100. (55-45) - 6 = +$400 (50-55) +2 = -$300 Net profit $400 - $300 = $100 If stock moves down to $45 your losses would be -$400. (45-45) - 6 = -$600 50 call option expires worthless, but you keep $2 premium. So, you would take the -$600 + $200 = -$400 net loss Now for put Debit spread example: Also a bullish spread. XYZ stock = $50 Sell 50 put for $2 Buy 45 put for $1 Stock goes up to $55. Both put contracts would expire worthless so your net profit would be $100. ($200 - $100) = $100 net profit Now, if stock goes down to $45. (45-50) +$2 = -$300 and 45 put would expire worthless so that -$100. Net loss = (-$300 + -$100) = -$400 Again the 1:4 risk/reward relationship. I believe I am right on this?? If I am, thank you so much, I'm starting to understand the basic option theory. I'm ready for you to open the curtain some more whenever you have free time. Again thank you so much."

prohobo said: "[B]Armed with this knowledge - let ME ask YOU some questions! Can you have a DEBIT spread and be SHORT extrinsic value (premium)? [/B] The answer is YES. I am not sure you answered this corrrectly with your answers. However, let's look at the simple answer below. Stock XYZ $50 CALL 45 $6 CALL 50 $2 If you would of purchased the 45/50 call spread for a $4 debit, you would have been SHORT premium, but the net position is a debit. Let's look at the break-down. CALL 45 = $6 Intrinsic value of the 45 call is $5 (stock price $50 - strike $45 = $5). Extrinsic value of the 45 call is $1 (call price $6 - intrinsic $4 = $1) Call 50 = $2 Intrinsic value of the 50 call is $0 (Stock price $50 - strike $50 = 0) Extrinsic value of the 50 call is $2 (call price $2 - intrinsic $0 = $2) (note: intrinsic value can not be negative, if negative round to 0) So if you purchased the 45/50 call spread for a $4 you would be short $1 of premium. Let's look at break-even P&L at expiration. Net debit $4 + long call $45 = $49 That means if the stock closes at $50 on expiration you position would increase to $5. Stock at $50 at expiration 45 Call = $5 (you purchased it for $6 so that would be a loss of $1) 50 Call = $0 (you sold that for $2 sot that would be a gain of $2) You maxium profit is $1 (Strike difference - net debit) Another way to look at that position is a $50 level covered call that was hedged at $45 and THAT leads us to the answer to the next question: [B]Can you create the two above example spreads a different way (using stock, calls, or puts)?[/B] What if you BOUGHT stock at $50, BOUGHT the 45 PUT, and SOLD the 50 call? It would be the exact same P&L graph as the position I just did above as an example. Let's break it down into two positions. First the $50 covered call. You bought stock for $50 and sold the $50 call for $2. This would give you a maxium return of $2 and a break-even of $48 on the stock before you started losing money. If you bought the 45 put for $1 to hedge that position it would create at max loss of put vs. stock to $5. However, you paid $1 for the put, but if you add in the short call of $2 = well your net premium is now short $1 ($2 call premium - $1 put premium). Thus your break-even is now $49, rather than $48. You are also hedged out at $45. Thus the max loss is now $4 ($5 stock to strike difference - $1 of short premium). As you can see you created the same P&L position as the debit call spread fpr $4, now by using put, stock, and calls. This strategy is known as a "collar" or sometimes "mix strike conversion" However - the important part of this lesson is two-fold. 1. A DEBIT spread CAN be net short premium! 2. You can create a bull spread OR bear spread with just calls, just puts, or a combination of puts, calls, and stock. This leads us to the MOST important understanding of options - SYNTHETICS. For EACH of the 6 different basis positions you can have: Long Call Short Call Long Put Short Put Long Stock Short Stock You can create a synthetic of that position by using a combination of the other two. Example: A Short PUT is the EXACT same thing as a Covered Call. Short (-) 45 Put = Short (-) 45 Call and Long (+) Stock Can you figure out the other 5 synthetics? [B]============== the fog begins to lift =============== ======you are entering the Synthetic Realm============ ======only true believers may enter and gain===========[/B] Once you understand synthetics it is the most POWERFUL tool in trading - it can get you out of trouble, learn to hedge off direction risk, flip positions from long to short, elemenent all delta exposure, add or reduce short/long premium, etc. Once you become ONE with synthetics - in the middle of the most hetic times and high volatilty sessions - you can trade circles around anyone else. It is the KEY understanding of being a market maker - and once you grasp that you quickly learn that Calls and Puts are the exact same thing. They are the Yin and Yang of each other, but are able to become each other with a single trade. You can learn to create the same position a multitude of ways. It is the Kung Fu of trading - nothing can touch it ! For me it is the ZEN of trading the Pure understanding of Curvature. I look a trading as simply WHERE I want to HAVE Gamma or Curavture and WHERE I want to be short Gamma. Call or Puts - it really makes no difference. While it is a VERY enlightening experience once you reach that "CLICK" and it becomes ONE with your understanding of trading - you reach an incredible new level of understanding and trading. No longer are you subject to "HOPE" strategies or "Dollar Cost Averaging" or Stock Pickening with only a POLAR and thus Polarizing Position. You can artfully hedge and limit risk, while at the same time execute a powerful advantagous position. No doubt - once you have hit that moment - you will wonder how anyone else can enter the arena of the financial markets with any moticum of success without this powerful weapon. You can become one with the market and as others lose money with a Binary position (either LONG or SHORT) you can profit. You will then learn to profit in ANY directional market and thus also limit your losses. It never becomes a WAIT-N-SEE - hoping the next news does not bring financial disaster to yourself while hoping for terriffic gains. Master the ART of Synthetics. Begin to view the positions as Curvature (rather than a simple long or short calls, puts, or spreads (It is NOT about credit or debit spreads anymore). See calls as puts and puts as calls. You will enter a new realm and you will Begin to really SEE for the first time. I started on this road almost 20 years ago - and now with a private firm (very small - a group of friends and partners) with our own money and some outside capital. The road has not ended for me and I still learning - but one thing we have collectively reached a long time ago - was this simple philosphy. For without it - our firm would not exist - I would be a broker or financial analyst somewhere - working at some firm. I am telling you (which I have not shared publicly) - this pure understanding of options and equities (also applied to other financial instruments) IS the secret. It's core prinipals are found in everyone of our strategies - our systems, risk management, etc -. Pricing models, strategy models, forecasting models - everything starts here with this simple concept. It's a long road - one that I have traveled on a long way - and no doubt it will not end - you never become fully enlightened - but if lucky have glimpses of it. It's late (1 am) and I guess watching a late night Kung Fu film (Prodigal Son) had me thinking in Kung Fu themes (not to mention I am a little foggy it being late). However - I noticed in my email that this tread (which I subscribed) had a response - thus I visited and decided to make known my little belief. While true - it all may sound silly - I seriously believe and look at it this way. I live and breath this stuff. I dream about strategies and positions. At bars and dinner I converse about it. It is to me both spiritually rewarding and challenging. You need to be passionate about this stuff to really move deeply into it. It is rare that people are able to make a living in what they truely love to do. I am very fortunate in that respect. Simply - I would do this if I was only paid a paultry salary - the by product of making money (with no cap) and having the freedom to explore this during my waking hours is truely a gift for me. Ok - it's obvious the late night, combined with the Kung-Fu, and maybe the extra Beer has kicked in. I should stop before I get to silly or off message. Hope this made some amount of sense. To outsider's it might seem that I have joined some Buddha Kung Fu Cult - I'll stop while I'm ahead."

Jase said: "Thank you so much for helping me. I don't understand synthetics quite yet or curvature. I am going to study it very closely now. I understand some of what you are saying, I guess I need that "click" to go off yet. I'm going to keep working at this. I do live and breath for this stuff, it's always been interesting to me ever since I was very young. I will get back to you on your other 5 synthetics soon... Again, thank you so much."

Bladerunner said: "Hello everyone, I'm new on this site and so this will be my first post. First, I have very little experience in options. I've indulged myself in some books on the subject and feel like I'm ready for my first transaction but I need to know if I'm off my rocker. Ok, here it goes. Originally I was thinking of buying POT stock but the share price doesn't allow me to control many of them since I'm not rich so, here's my logic...options. I don't want to stretch my neck out too far at this time so my strategy is as follows. I would purchase Deep ITM calls on POT...say Sep 150 which are going for approx $74. Why Sep?...well, it appears by looking at the yearly chart, POT may see new heights around that time frame. Now, I realize by choosing this option I would be paying $3.5 as extrinsic costs based on current SP. Well...I don't like paying $3.5 so...I thought, why not in addition to the calls, write SEP 300 which would give me $3.7 and that would cover the extrinsic cost. I realize by doing this I would now be capped but probably won't see 300 anyhow. The way I see it...this strategy would enable me to control 3x as many shares for the same cost. I'm I thinking right here or am I at risk? Thanks in Advance"

drdan said: "@Bladerunner - you do realize that one contract of POT Sept 150 is going to cost you $7400? I noticed you said you did not have a lot of money. One of the little nuances of options is that the chains are written on a share price basis however most options are written for 100 shares, so you need to multiply the price by 100. @Prohobo - In regards to your Kung fu options - I could not totally agree with you more Adjustments (Synthetics) are the secret to option trading. I wish I had the time to wrap my head around options so completely that I could make adjustments such as you are suggesting - going from a straight call to a vertical to a butterfly to a ratio back to a vertical as the market dictates your response and you move with it. I have just found it easier or actually more simple to stick with a strategy and ride it out making simple adjustments to lock in profit or reduce loss. One question for you... In your adjustments, part of the art of trading is to know when to adjust, when do you adjust? Are you using standard deviations? or some specific price movement? Is it different for when your trade is going against you vs when you are profiting? (lowering your cost/risk vs locking in profit). OK that actually is a couple questions but it is all related. I usually use a specific price point based on support and resistance but I am leaning on using standard deviation based on current IV to do my minor adjustments. One last thing your example has stirred up the spirit back in me (your first one not this last zen kung fu master one...:arf:) to going back and looking at making better decisions on what to trade - debit vs credit spread. I think this will get me excited about relearning how to adjust and start trading synthetics. Hell I haven't traded in a virtual account for quite some time, its back to the drawing board. Thank you for the great discussion."

prohobo said: "[QUOTE=drdan;71306]@Bladerunner - you do realize that one contract of POT Sept 150 is going to cost you $7400? I noticed you said you did not have a lot of money. One of the little nuances of options is that the chains are written on a share price basis however most options are written for 100 shares, so you need to multiply the price by 100. @Prohobo - In regards to your Kung fu options - I could not totally agree with you more Adjustments (Synthetics) are the secret to option trading. I wish I had the time to wrap my head around options so completely that I could make adjustments such as you are suggesting - going from a straight call to a vertical to a butterfly to a ratio back to a vertical as the market dictates your response and you move with it. I have just found it easier or actually more simple to stick with a strategy and ride it out making simple adjustments to lock in profit or reduce loss. One question for you... In your adjustments, part of the art of trading is to know when to adjust, when do you adjust? Are you using standard deviations? or some specific price movement? Is it different for when your trade is going against you vs when you are profiting? (lowering your cost/risk vs locking in profit). OK that actually is a couple questions but it is all related. I usually use a specific price point based on support and resistance but I am leaning on using standard deviation based on current IV to do my minor adjustments. One last thing your example has stirred up the spirit back in me (your first one not this last zen kung fu master one...:arf:) to going back and looking at making better decisions on what to trade - debit vs credit spread. I think this will get me excited about relearning how to adjust and start trading synthetics. Hell I haven't traded in a virtual account for quite some time, its back to the drawing board. Thank you for the great discussion.[/QUOTE] drdan, I think you may of missed my point. It is not about MORE adjustments - it is the ability TOO adjust and KNOWING what adjustments are available. It would never be right of me to critise anyone's strategy. For if your strategies work - then who am I (or anyone) to say what you are doing is wrong. However, when I did do some consulting - it was to address the RISK of those strategies and figure out methods to maintain those strategies while reducing the risk profile. I know you didn't make that inference - however I don't want my post to come off for anything more than what I intended. The POWER of synthetics is the understanding of the (Yin and Yang) relationship of Puts, Calls, and Stock. Without the full understanding of them - you may not be able to SEE all your options. As for adjustments..... Well we first have a short-term forecasting model. It does use a type of standard deviation, but it is NOT a linear model, includes fat tails, as well as volume (time and price accumalation) - all of which helps forecasts a probability range. We don't forecast the price, but rather forecast the probability ranges. It is then entered into our pricing model and we compare our theoreticals with the markets. Our strategies utilize price descripancies between our theos and market prices to build the position. Our positions then profit with-in that range, with defined risk out-side of that range. You could say building many strikes into a giant fly type position. Adjustments come in two fashions - managing risk and locking in gains. The model indicates when the forecast changes (theo prices) and thus the adjustments take place. The system looks simply at long or short curvature and then adjust the curvature and adjust the position via synthetics. The positions are alway changing when the model dictates. Without going into details - it is truly the concept of synthetics (and viewing the positions strictly from Gamma "curvature") - at the core of the system. We don't buy/sell a spread based on market direction and wait. That is too directional for our system."

drdan said: "Nah, I did not miss the point and no I did not think you were criticizing my strategy. I actually do believe that if I were a full time trader I would absolutely NEED to learn how to adjust using synthetics. Possibly right now only trading part time, I need to learn how to adjust better than what I am, mostly because I hate to lose, even if it is only once in awhile. I would also like to take advantage of higher probability risk with lower capital risk trades and learn how to turn the trade around to my advantage when things go either way and the only way to do that is to learn how to adjust properly. Using my example I did not mean for it to say that I would do that many adjustments just that the possibility of going from one trade to another is there to do it, if necessary. I believe that making too many adjustments hurts the bottom line just from commission and also from my philosophy of keeping things simple and sleeping better at night because you are not worried about your trade so much. So no hard feelings felt here, I love your posts as it keeps me thinking as well. It has been a long time since we had great discussions on the options side of this forum. I have not been posting on here in awhile. I come back and find all the regulars I used to converse with were gone, but even they did not talk options like we are here. I find this great and it will help anyone else that might just happen to be reading it. Thanks for your answer to my questions. I appreciate it."

Jase said: "[QUOTE=prohobo;71302] This leads us to the MOST important understanding of options - SYNTHETICS. For EACH of the 6 different basis positions you can have: Long Call Short Call Long Put Short Put Long Stock Short Stock You can create a synthetic of that position by using a combination of the other two. Example: A Short PUT is the EXACT same thing as a Covered Call. Short (-) 45 Put = Short (-) 45 Call and Long (+) Stock Can you figure out the other 5 synthetics? [/QUOTE] Ok, I answered your questions again. I believe I understand this, I think I had a "click" go off. I did some examples with real world companies and did the math with these different synthetics, and I understand how to minimize risk by using these strategies. I will post one of my examples I did on paper after I answer the questions. A [B]Long Call [/B]is the exact same thing as a Protective Put or Married Put. Long (+) Call = Long (+) ATM Put and Long (+) Stock A [B]Long Put [/B]is the exact same thing as a Long Call Shorting Stock. Long (+) Put = Long (+) ATM Call and Short (-) Stock A [B]Long stock [/B]is the exact same thing as a Long Position in Stock. Long (+) Stock = Long (+) ATM Call and Short (-) ATM Put A [B]Short Stock [/B]is the exact same thing as a Short Position in Stock. Short (-) Stock = Long (+) ATM Put and Short (-) ATM Call A [B]Short Call[/B] is the exact same thing as a Short Put Shorting Stock. Short (-) Call = Short (-) ATM Put and Short (-) Stock This is the correct answers to your questions? Ok here is one of my examples I did on Synthetic Long Stock if I felt bullish on this stock. (I never did research on this company, I'm just using it only for an example) But I don't know the "technical term" for what this strategy is called. (ie butterfly, condor, or whatever) because I added the Buy ATM PUT for downside protection. I did a real world example on CPN company. CPN stock is $20 Buy ATM CALL for $1.25 Sell ATM PUT for $1.50 Buy ATM PUT for $1.25 (to protect my downside risk) If the stock went down to $15. My losses would be max -$1 ATM Call would expire worthless so that's -$1.25 Sell ATM PUT would be ITM $5 - $1.50 = -$3.50 Buy ATM PUT would be ITM $5 - $1.25 = $3.75 (-1.25 + -3.50 + 3.75) = -$1 Now, if the stock went up to $25. My profit would be $4. ATM call would be ITM $5 - $1.25 = $3.75 Sell ATM PUT would be OTM = + $1.50 Buy ATM PUT would be OTM = - $1.25 (3.75 + 1.50) - 1.25 = $4 profit (but this is not the max, because if stock went up more, the profits would be even higher. Unlimited upside) Now of course this isn't taking into account Time Decay (Theta), but from these simple examples am I doing this right? Thank you again for your help. I really do appreciate it. I've been studying for 4-5 hours everday on this stuff trying to understand as much as I can. I really enjoy this and the homework that you give me. It helps me prepare myself for what I have to do. Again thank you for your time and effort put into this."

hasse_john@yahoo.com said: "One of us is confused, and it is probably me. It is my understanding if you buy and sell the exact same thing (in your example it was an ATM put) that it is a 'wash' and you don't own it. There is a place for buying and selling different strike prices, or different contract months."

Jase said: "Yeah, after I posted that, I thought that it would be a "wash", but I'll let an experienced trader to let me know what I did wrong. I have a question for anyone. I was looking at OptionVue 5 trading software, it looks really good. Anyone else use this software, and is it worth the investment?"

drdan said: "Yes buying and selling the same option type with the same strike price and same month would be a wash. I only use software provided by the broker or found for free on the internet. Not that any of the paid for stuff is bad I just have found for my part time trading I do not need anything more."

prohobo said: "You got them! As to the follow-up questions: It is ONLY a wash when ALL three sides are compeleted on the same strike (Stock, Call, and Put). Any two create the synthetic of the third - which is NOT a wash. When all three sides are complete - directional risk is eliminated (a WASH) - you are still subject to RHO (interest rate risk). All three sides of the trade (closing and completing an arbitrage) is called either: Conversion: For LONG stock (long put and short call) - you pay long carry interest on this position. Benefits from falling rates. Reversal: For SHORT stock (short put and long call) - you receive short interesting on this position. Benefits from rising rates. The advantage of knowing sythetics is that it allows you to CLOSE (or WASH) out a winning or losing trade without figuring out the unwind. It is also extremly easy to price options and KNOW where your profit and risk are at any time (without the need of pricing models). Example: If I bought the 100 level puts for $1 and bought stock at $101. I know it is just like buying the 100 level call for $2. My position is a long synthetic 100 call for $2. To close the position at ANYTIME and lock in the profit (minus interest) all I have to do is sell the 100 call for anything over $2. I then converted out that line (100 strike) creating a conversion through expiration. You can also create synthetic bull spreads. Knowing my synthetic all price - if the stock rallied and I sold the 105 strike for $3. What would my position be? You can even leg into synthetic Condors, Butteflies, and other flies - once you know the Yin-Yang relationship. When I first started on the floor - we only had a pen and paper in hand (and calculator - if we had time to use it). We didn't have handheld computers and everything was manual. Understanding synthetics allowed a trader to manage his position on the fly fast, easy, and even in the most highly volatile situations. I think traders (both professionals and retail) spend more time worrying what a computer tells them - then figuring out how to do the math themselves. I saw that happen in the late 90s on the floor - when new traders had a handheld computer to do all the math for them. Got to go - getting busy... Oh - by the way - Today is the day that we will mark down in history as the moment the Government bailed out it's own cluster f####! Socialism = here we come......"

Jase said: "Thank you prohobo, I think I understand the basics of synthetics. As I deal with this more and more and put it into practice and real trades I'll understand it even more. You have been very helpful with my learning knowledge of options. Again thank you so much for your time and effort. I hope this thread can help anyone else who wants to learn options. Again thank you."

drdan said: "[QUOTE=prohobo;71330]You got them! As to the follow-up questions: It is ONLY a wash when ALL three sides are compeleted on the same strike (Stock, Call, and Put). Any two create the synthetic of the third - which is NOT a wash. [/QUOTE] Are you saying that because I hold the stock, a broker will let me hold both a bought $50 Put and a sold $50 Put?"

prohobo said: "[QUOTE=drdan;71348]Are you saying that because I hold the stock, a broker will let me hold both a bought $50 Put and a sold $50 Put?[/QUOTE] Sorry, but I do not fully follow you question, but let me try to answer. Example: If you purchase a 50 level call for $1 (Long Call) If you short 100 shares of stock at $50 (Short Stock) You Synthetic position is a LONG 50 level put! What that means is that your P&L (profit and loss) graph from the Long Call and Short Stock position look like a Long Put. As the Stock goes down your short stock position profits. If the stock goes up the short stock position is off-set by the long 50 call (The hedge). I would look at the position as a LONG 50 level put (regardless if it was made with short stock and long calls) Doing the simple math, (Call price $1 + Strike Price 50) - (Stock Price $50) = $1. That is the price you paid for the SYNTHETIC PUT. Now all you have to do is sell the ACTUAL 50 level put for anything OVER $1 for a net profit. Which at that point would wash out the position. Your postions would be FLAT. The net position would look like this: Long Call, Short Stock, Short Put. That is also known as a "Reversal". You additionally SHOULD be collecting interest on that position, because it is a net credit. It benefit additionally from rising interest rates, since you would begin to collect more and MORE interest from the net credit position if rates went up. I hope that helps."

Jase said: "I have another question for you prohobo. You talked about "curvature" What exactly is that? Can you give an example? Thanks again."

prohobo said: "Curvature = Long and Short Gamma. Most people trading options fail to realize they are really just trading Gamma. Until they understand Gamma (the powers and dangers) and how it impacts their P&L then they will have little understanding HOW their position is making or losing money. Gamma is the 2nd derivative of Delta. It measures how fast your deltas will change. Gamma doesn't know calls from puts - it simply is a long vs. short curvature thing. (Gamma, unlike Delta, is the same for calls and puts.) Long gamma means the P&L lines move UP and short gamma means the P&L lines move down. Here is a simple rule that might help in understanding how GAMMA works FOR YOU! [B][CENTER]You want stocks to move AWAY from your LONG GAMMA and you want stocks to move TOWARD your short GAMMA.[/CENTER][/B] Gamma strategies and positions are lumped into two basic groups "FRONT SPREADS" and "BACK SPREADS" Back Spreading type strategies or positions are LONG GAMMA. Example would be a long Straddle. The position makes money when it moves AWAY from the long gamma strike. Front Spreading type strategies or postiions are SHORT GAMMA. Example would be a butterfly or short straddle. The position makes money when it moves TOWARDS the short gamma strike. Back Spreaders usually have limited risk - but suffer from long premium (THETA is the enemy). You need and want movement. Many intra-day delta scaplers are back spreaders. -you need volatility for this to work. Front Spreaders sometimes have larger risk - if the stock makes a big move. But they make money from SHORT PREMIUM (Time is on their side - THeta is their friend). They do NOT want movement - or want movement to their short gamma. However - don't get pigeonhold into BackSpreading or Frontspreading - you can have a position that has a combination of each. One is not right and the other is not wrong. They are BOTH important and useful tools and positions. Understanding curvature and WHERE you want your POSTIVE and NEGATIVE curvature allows you to build the position you want. That takes us to VEGA and the impact from FRONT and BACKSPREADING. Or just building VEGA type strategies that benefit from Premium expansion and contraction. Hope that helps..."

Jase said: "Ah, yes it makes more sense now. Thank you again for your helpful advice."

drdan said: "OK let me clarify, [quote=Jase]CPN stock is $20 Buy ATM CALL for $1.25 Sell ATM PUT for $1.50 Buy ATM PUT for $1.25 (to protect my downside risk)[/quote] This is the position that Jase thought to put on. Then John wrote - [quote=hasse_john@yahoo.com]One of us is confused, and it is probably me. It is my understanding if you buy and sell the exact same thing (in your example it was an ATM put) that it is a 'wash' and you don't own it. There is a place for buying and selling different strike prices, or different contract months.[/quote] Then I wrote - [quote=drdan]Yes buying and selling the same option type with the same strike price and same month would be a wash. [/quote] To which you responded - [quote=prohobo]It is ONLY a wash when ALL three sides are compeleted on the same strike (Stock, Call, and Put).[/quote] Which confused me because buying a Put and then selling the exact same Put would cancel it out. A broker will sell back your exact same option that you purchased and vice versa regardless if you own the stock. I realize that it is not a total wash on the position as Jase would still own the stock and the call but not a put option. I was just clarifying with my question to you because maybe I did not understand why it was not a wash of that option. I believe we were mixing terms as I assumed John and Jase were thinking of only the Put option as a wash and you were thinking of the entire position being a wash. BTW, good example of a whole wash play. How often do those come around?"

prohobo said: "[QUOTE=drdan;71417]OK let me clarify, This is the position that Jase thought to put on. Then John wrote - Then I wrote - To which you responded - Which confused me because buying a Put and then selling the exact same Put would cancel it out. A broker will sell back your exact same option that you purchased and vice versa regardless if you own the stock. I realize that it is not a total wash on the position as Jase would still own the stock and the call but not a put option. I was just clarifying with my question to you because maybe I did not understand why it was not a wash of that option. I believe we were mixing terms as I assumed John and Jase were thinking of only the Put option as a wash and you were thinking of the entire position being a wash. BTW, good example of a whole wash play. How often do those come around?[/QUOTE] Thanks for clearing that up - I think I was confused too. It's hard to post on the forum and always get a point across. hee hee.... As per reversals and conversions - I would say more than 70% of our postions are closed out using some method of Coverting, Reversing, Boxing, or Jelly Rolls. It is just to hard has positions get bigger to look at EACH individual option as a seperate P&L rather than the postion as a whole. does that make sense?"

drdan said: "Makes sense. I hope it makes sense to others."

Jase said: "I was monitoring OSTK (Overstock) and I couldn't understand why it was at $27.70 a share yesterday. I was for sure the stock would go down, so I bought 10 put options (paper money) figuring the stock would go down in the near future. Low and behold yesterday it dropped $11.31 a share, I was shocked to see it go down so much so fast. Too bad it wasn't real money, or I'd have had a huge profit. Oh well, that was a good learning experience for me to see that even though I had no real money into the situation. The odd thing was that the stock went up like over $1+ for the past 3 days which made no sense at all. It looks like it was pumped and then dumped. I am happy that I didn't own any of that stock or any bullish strategies. hehe This market is so unpredictable now though, I'm definetely going to try to stay on the seller side of things. As I have a feeling that it will most likely go down and not up for any stock over a short period of time."