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Celsion Corp. Message Board

  • lidopete lidopete Jan 18, 2013 1:39 PM Flag

    selling puts? where is the danger

    what is the down side of selling Feb 8 puts, assuming i recieve a premium of $4
    if bad news stock goes to $1 and it is put to me at $8
    if good news i keep the $ 4 premium
    i know i am missing somthing here, someone please help me with advice

    Sentiment: Strong Buy

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    • lidopete,
      xlquser45 had the best (correct) response. Once again, I urge you (and anybody else) playing with options to develop your CLSN THESIS first, before investing any money. You have to know what your expectations are for the stock: both price and date by which the stock hits that price. One thesis might be: CLSN hits $17 by 16 Feb (OPEX).

      Given your thesis and the amount of money you wish to invest, it's an easy mathematical set of computations to determine the most profitable trade. This could include selling OTM calls or executing a combo like strategy (such as xlquser4's example). With selling puts, though, you need to know how much margin is required to support those puts. That will soak up some of your investment, but if your thesis is correct, you will win twice -- with the puts expiring worthless and your calls appreciating.

      I can't say this enough about the THESIS. So many investors throw money at an 'idea' and then when it goes south, they don't know whether to sell, invest more, or pray.

      I also want to make sure that you weren't intending to BUY the puts, which would be considered as "insurance" for the shares you own at $8. If you bought the puts at $4, then you'd save $3 if the shares went to $1, or you'd lose the entire premium if the shares rose above $8. That's why it's called insurance: if you don't use it, the premiums were for nothing (like auto or health insurance).

      Hope this helps.

    • It means that if stock price drops below $8 you will be buying it for $8 minus the premium of $4. The final entry value would be $4. If you already have 100 shares at $8 your cost average would be $6 for 200 shares (without any margin costs). If you already have more than 100 shares you need to adjust your cost average accordingly. If the price is above $8 at expiration you will most likely keep the option premium and your $8 shares will be cost adjusted to $4.
      You might want to consider some lower priced puts to sell since they currently have a better implied volatility premium with a little less risk.
      The major downside risk is CLSN tanking and being a bag holder at $6.

    • If you already own it then you're selling covered puts, which increases your risk because if the stock goes to $1, you lose $7 twice. (You lose your $4 premium and the $3ish to cover the put PLUS the $7 drop in your shares).

      • 1 Reply to dr.tjm42
      • A covered put occurs when you are SHORT the stock and are willing to have the stock put to you at the put selling price.

        If you're really bullish on the stock you would sell puts and take the premium and buy calls for a significantly reduced entry price. This strategy is called a synthetic long.

        The strategy would involve:
        Selling the Feb 8 puts for $4 for a $4 credit
        Buying the Feb 8 calls for $2.50 for a $2.50 debit
        The result is a +$1.50 to your account.

        This creates a net option cost basis entry of $6.50 if those shares are put to you at $8.
        Your cost average would then be ($6.50 + $8)/2 or $7.25 after Feb expiration.
        If the price stays above $8 your net entry would be $6.50 with unlimited upside potential until expiration.

        The put sale premium should also drop over time due to decay and the current high volatility premium. Currently the IV is 445% IV vs. 111 HV! WOW! If the price volatility declines the IV put sale premium is a winning trade all by itself.

    • If you're that bullish on the stock, you should buy out-of-the-money calls. Otherwise, if the stock goes to $20, you're capped at the $4. If the stock goes to $.50, you'd lose the $4 premium plus another $3.50ish to get out.

      Let's say you buy a Feb $8 call for $2.75. If the stock goes to $1, it expires worthless and you're out $2.75. However, if the stock does go to $20, you're call is worth at least $12 so you'll make $9.25ish.

      Personally, if I were feeling confident in the results and wanted to make a bullish play, I'd buy calls. You'll be kicking yourself if the stock goes to $20 and you can do any better than keeping your $4 premium.

    • If it goes to $1 and you are forced to buy at $8 then that is $7 loss. Less your $4 premium you are now at $3 loss.

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