This is obviously a very bad sign for longs. Failure on the second look will definitely take it below $2 IMO.
Interesting, my understanding is that you buy puts to limit your downside from an UP position. Now a smart short would buy puts when the price was up, to cover his SHORT. He would buy those puts cheap when its up, then short the stock and let the puts expire worthless only owing the price of the put over strike when he bought. If the price went up instead of down, then yes he would lose also, but as MOST people expected the price went down because of first look. Example. They could buy the put at .35 and short it all the WAY DOWN to whatever. What a STRATEGY!
<<(remember, shorting a put results in losses when there is a decline).>>
I'd agree with that statement, but only for a naked put... My comments applies to the "covered put"... In the covered put the losses could be significant... As an illustration...
<<You are correct, however you misunderstand what is covered. i.e., the put position is covered by short shares.>>
Actually I was goin after a different aspect...
The strike of the put limits the extent of the coverage...
An option with a strike often has a premium where an option deep in the money trades with a high delta.
From a numbers perspective I offer the following to demonstrate using the closing numbers for YMI OCT (cut from close at bottom of page)
Stock @ $3.50 (7-12 close)
OCT put @ strike $5 value at bid $2.05
OCT put @ strike $7.50 value at bid $4.00
for the $5 strike the put brings in $2.05 which is a $.45 premium to the spread. The $7.50 strike is bid at intrinsic value.
IN deciding to short the stock the indication is that I am expecting the stock to go down... While the objective might be to enter the position in stages, for arguments sake lets say theat the positions were opened together (opening a short put position and an equal number of shares short)...
The strike price for the put becomes important.
If the $5 put was opened I have the attraction of the premium as a potential ($.55)...
The $7.50 is at intrinsic value ($4 with the stock at $3.50), so the money I make on the short... I lose on the Put. (In a staged senerio I hopefully shorted naked at a higher price and entered the short put position later at a lower stock price. Closing the short position would make more sense than opening the "covered put".)
The issue I was pointing out earlier is that if the stock was to advance to the AG Edwards PO of $15, the "covered put" would really not be covered at all.
stock @ $15
short @ $3.50
short a put @ strike $7.50 for $4 premium
result $15 to cover - ($3.50 short sale + $4 covered put) = a loss of $7.50
stock @ $15
short @ $3.50
short a put @ $5 for $2.05
result $15 to cover - ($3.50 short sale + $2.05 covered put) = a loss of $9.45
Neither of these situations meets my definition of covered... WHen I sell a covered call I am only exposed to having to deliver shares at a predetermined total return.... While I might miss some potential profits I am not subject to losses.
The covered put aspect only works when the stock price remains under the strike price of the put, but there is no way of knowing what the highest price of a stock may be... and the premiums favor near the money positions...
My earlier comment was
<<The "covered put" is only covered against a short as long as the put remains out of the money... once the issue rises above the strike of the put... the short position becomes a loss to the holder of the married short and put contract that was opened....>>
- - - - - - - - - - - - - - - - - - - - - - -
Strike Symbol ...Last .Chg .Bid .Ask .vol OpenInt
5.00 YMIVA.X 2.10 0.05 2.05 2.10 121 31,618
7.50 YMIVU.X 3.40 0.00 4.00 4.30 1 2
You are correct, however you misunderstand what is covered. i.e., the put position is covered by short shares. Which means simply that, if the stock goes down, you are covered against losses in the short put position (remember, shorting a put results in losses when there is a decline).
It's the underlying stock position that makes your short option position covered not naked.
Look at the following days post, where I stated my error where yahoo did not clear the volume... that did not negate the open interest increase in both july and september on the prior day...
Current position changes are not reflected in trading which indicates the shares were put to a holder...
Your .11 cent assumption means you know the status of the end state of the trade at point of origin.... you don't... (although 3% for 2 weeks is nothing to scarf at)
with the enough said on both parts I will no longer interact with you... I don't care what you think or say... but I do hope you prosper in your trades from your.... goodbye
...See your original post 6258. Your first premise was that someone sold 10k more JULY 5 puts bringing the open interest to 21k contracts and that was a "bullish sign". When I pointed out to you that they did not trade on July 6th and the open interest remained the same for July, you next attempted to draw your analogy to the Oct 5 put open positions and the increase of 10k put contracts from an earlier reported total.
Now if I can draw your attention to the current "open" position for the July 5 puts you can see that they have DECREASED from 11k plus contracts to approximately 4,478 contracts. Positions for July, which expire in three days, are obviously being closed out. Those short puts are not waiting for the stock to be put to them at $5 on Friday so they can save .11 on the purchase price (which was your initial suggestion). They're closing out their positions...nothing more...nothing less.
The increase in the October put position is exactly like I suggested IMHO. Investors simply rolling out their positions from July to October plus others probably desiring to protect their long stock positions with more major event data possibly being released and are buying puts for protection.
....."A short put is "covered" if there is also a long put in the account with a striking price equal to or greater than the striking price of the short put"....
"The Free Dictionary" by Farlex....http://financial-dictionary.thefreedictionary.com/Covered
As I said earlier...simply the way of closing out a long put in the account.
<<selling (or writing) a covered put means shorting a put against a short stock position.>>
Your definition was about what I'd have come up with, but there is a significant difference from the covered call... The covered call is against a stock which could go below the strike and become worthless... or rise and the only damage is the potential loss (no out of pocket loss) to the originator... The "covered put" is only covered against a short as long as the put remains out of the money... once the issue rises above the strike of the put... the short position becomes a loss to the holder of the married short and put contract that was opened.... so "covered put" just doesn't hold up from a potential loss perspective... which is the definition of covered in my book... It certainly would !!!NOT!!! (not was missing from the previous post) apply to $5 puts written against YMI which has an AGE PO of 15...
A stock can go to zero but there is no defined limit to how hih the price can go.
Thanks for the input