Since there's such a good vibe to this thread and everyone's happy, I thought I would contribute something to keep it going. What follows is a cute little post I copied from a US forum a few years ago. The gung-ho cowboy who wrote it may still be a shootin' an' a hootin' but on the other hand it wouldn't surprise me if he's a dead Indian... Unfortunately this is too often the outcome of life in the fast lane... but it makes entertaining reading for the afficianados...
"it's not hard!!....you just sell out of the money put to open, you receive 1000 dollar credit, your put is 40+delta (50+delta is at the money) you only want to risk 500 dollars(50% of premium received) so you like to buy it back at a loss at 1500 dollars if you are losing,but you get caught with your pants down(you're in the bathroom as price races down past your intended stoploss) you see the put's worth 1750 now so you sell the underlying quickly, now as price continues down you make a 250 dollar gain from your underlying short till the short put option is 99+delta, your underlying is 100- deltas thus at this point every point gained is lost by short put......now you see it bouncing and moving up ,GREAT BUY SIGNAL off support extremely oversold you buy back future to close and as price moves up or sideway you start to make your money back on the short put and all of a sudden you are actually making money. You can use the difference from credit received from current value right away - say now worth 500 dollars - you sold for a thousand so 500 can be used,unlike buying option where you have to close position before allowed to use gains! Again many other ways to skin this type of dilemna,you can turn a bad into a good buy by adjusting and using other instruments, know thy instruments, then it's a matter of time,how simple is this?
By the way, that put you sold when it was trading for 1750 dollars: it's delta was most likely nearing 75+ or 80+ deltas depending how fast the price moved. Implied volatility will overprice that put if it is fast market conditions, because of uncertainty of where it will bottom out, that is why it's best to sell when implied volatility is high. Kinda like insurance, ever try getting flood insurance as it's flooding? or car insurance as you're in a wreck,or hurracane insurance when everybody and their mother is getting hurricane warnings in your area? so next time you see limit up or down consider writing options."
The key points are: 1. "It's not hard !!" 2. "how simple is this?"
