I'm fairly new to investing and the options lingo has a lot of overlapping terms,making it hard to google answers.
Lets say I think that stock ABC is going to drop significantly in the next 2 months. I would like to use options to profit off of that, but I don't want to short because I'm not comfortable with unlimited downside in case I'm wrong. I also do NOT own any ABC stock.
My understanding is I can do the following:
- Buy a "put option" as "buy to open". This gives me the right, but not the obligation, to sell ABC stock at the strike price by the given date. For this privilege, I pay a premium upfront.
- I would not want to "buy to close" as this would be "shorting" and leave me on the hook to cover the position (though without paying a premium).
- Since I don't have stock in ABC I could not exercise the contract even if it were "in the money" (profitable), but I CAN sell it to someone who has stock in ABC who would want to exercise to offset their losses.
Questions:
- Are the above all fully correct? I really don't want to accidentally buy the wrong thing and be on the hook.
- If that's all right, how does part 3 work? I don't see in my Ameritrade window a place to buy and sell existing options on an options market. It seems like the options tab exclusively deals with creating new contracts (options) not buying or selling someone elses. Is there ever issue with trading away an option in the money?
Submitted February 01, 2021 at 10:53PM by CobaltBlue https://ift.tt/3crBPaG
