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Notes On Options

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Posted by Everyday-Freethought on 2018-02-11 at 01:13:36

I used to know someone who traded on the floor of the NYSE. Here is something they told me about options. I wrote it on a piece of paper years ago that I just found recently.

call (right to buy) – in the money when market above strike price

put (right to sell) – in the money when market below strike price

x Buy (long underlying) Sell (short underlying)
Call limited risk, unlimited gain limited gain, unlimited risk
Put limited risk, unlimited gain limited gain, unlimited risk

If selling has limited gain and unlimited risk, why do it? From what I wrote: “Premium upfront ( most options expire worthless); Higher chance of making money; may sell near maturity”.

From another sheet:

Options – downside – limited to price

short option – limited gain, unlimited loss. Cash upfront. Margin required.

Covered call – write call/put -> selling that option

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