Subject: Re: The good old days ...
Mungofitch:For the first time, I'm thinking of buying a few puts. Not that my portfolio need protecting, but I might make a buck next time the market dips. It's hard to pick a suitable one, though. Not only do you have to be right about the direction, but also the timing and size of drop. If the idea is to make most of the profit on rising time value, (the most difficult way to make a buck from options), you'd want long dated ones. Time value is maximized the first date that the strike price hits the option's strike. $4.70 will get you a January $400 put, but that might not be long enough. Maybe $9.15 would get you a June 2025 $400 put.
But then again, surely there are other stocks that would drop a whole lot more in a market blip, and perhaps more predictably.

Im just trying to understand everything about options and how they work before I start using them to bankrupt myself :)

So I'm looking at this and thinking, why would you choose going long a put instead of going short a call? I think I have my answer: if you are long a put you can keep your put open with no risk to upside gains from your stock. But if you write a covered call, you will always cap your upside gain and indeed you are "paid" to cap your upside even lower if you dare.

And to fill in the blanks on the long put strategy. Your goal is to buy an OTM put for a low price, and then sell it for a higher price on a price dip.

Your tradeoffs include

1) going further OTM (to a lower strike price) lowers the cost to buy the put, but also increases the size of the price dip you need in order to drive the price of the put up enough to make it worth selling.

2) going further time-to-expiration raises the amount of put price appreciation as stock price falls, due to its higher time values, but raises the cost of buying the put due to its higher time values.

3) while a covered call pays you the maximum time premium up front, to get that max you have to be at the money (ATM), or Strike = StockPrice, which means if the stock price goes up, you lose your gain on that stock into your loss on the covered call, whereas a long put you completely preserve your return on stock price going up.

4) while a covered call requires that you own one share of stock per call option share you short, a long put can be bought without needing to own the underlying stock.

If I got something wrong, or am just missing a point, please chime in!

One of these days, I am going to fully understand options, and will probably conclude that I should mostly just own straight stock. But in the meantime, what a fun (and sometimes expensive) ride it is learning about them!

R:)