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how much money I can lose if the trade goes against me


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how much money I can lose if the trade goes against me

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  #1 (permalink)
Yreka, CA United States
 
 
Posts: 11 since Sep 2014
Thanks: 0 given, 2 received

I am a newbie to options and hope someone can help me with a question. I have read a few books and am still unsure how much money I can lose if the trade goes against me. Let's say I buy a call for 75 cents and the trade goes against me by a $1.50, however there is still one week to expiry when I scratch the trade. Will I lose the entire 75 cents or just part of the time value. Thanks in advance.

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  #3 (permalink)
Long Island, NY
 
Experience: Advanced
Platform: TOS & Tastyworks
Broker: TD Ameritrade
Trading: Equities, index options and futures options
 
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If you buy an option then your maximum loss is the price you paid plus any fees and commissions. If general an option will tend to hold some value with one week left before expiration but how much depends on how far out of the money it is and the prevailing volatility. You can use a model such as Black-Scholes to get an idea of what it will be worth but a better way is to look at the historical prices of the options in question and look for similar conditions to see how they actually traded.

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  #4 (permalink)
Yreka, CA United States
 
 
Posts: 11 since Sep 2014
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Thanks for the reply. So from what you are saying, would it be safe to assume that at this point any time value I have left on this option would be offset by the fees and commission I would incur by selling to close it. And so at this point perhaps it might make more sense to hold it in hopes of a big move in my direction and just let it expire worthless if the big move doesn't happen. Would you agree?

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  #5 (permalink)
Long Island, NY
 
Experience: Advanced
Platform: TOS & Tastyworks
Broker: TD Ameritrade
Trading: Equities, index options and futures options
 
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Posts: 174 since Apr 2010
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hummingbird View Post
Thanks for the reply. So from what you are saying, would it be safe to assume that at this point any time value I have left on this option would be offset by the fees and commission I would incur by selling to close it. And so at this point perhaps it might make more sense to hold it in hopes of a big move in my direction and just let it expire worthless if the big move doesn't happen. Would you agree?

I would agree that it makes sense to keep the option if it costs more to close it out than it's worth. With a week to go however, many options will often have enough value to salvage by selling them. You know what your costs are and can compare that to the bid on the option in question. You can also leave an offer with your broker in an open order and hope it gets filled as the underlying moves around.

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  #6 (permalink)
Vail, CO USA
 
 
Posts: 12 since Jan 2015
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Your trading platform should tell what your max loss and gain would look like for the trade you are about to post, but here is a quick review:

Buy call/put

max risk = price you pay + commissions

max gain = unlimited

Sell call/put

max loss = stock price at strike * 100 (i.e. if you sell put against AAPL at 120 strike, your max loss will be $12,000) plus commissions

max gain = credit you receive minus commissions

Sell spreads (put spread, call spread, or Iron Condor)

max loss = a spread width plus commissions minus credit you received (i.e. if you sell bull put spread at 120/125 strikes for 0.45 credit, your max loss will be 125 - 120 = 5 * 100 = 500 - (0.45 * 100) credit = 455). Iron Condors count only one leg as max loss as you cannot lose on both.

max gain = credit you receive minus commissions

Buy spreads (put spread, call spread)

max loss = the cost you paid plus commissions

max gain = the spread width minus cost you paid and commissions (i.e. if you buy a debit call spread at 125/120 strikes and you pays 0.45 debit, you can make: 125 - 120 = 5 * 100 = 500 - (0.45 * 100) debit = 455)

There is a very good book "The Bible of options strategies" by Guy Cohen. Buy it and there you can find almost all possible options strategies with explanation when to take it and how to play it. Nevertheless I still recommend opening a paper account and try it there first to see how those trades work.

Cheers

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