Deonb,
Thanks for the explanation. I actually did this play today, or at least I thought I did, but made one big mistake. :redface: In stead of "sell to open" put I did a "buy to open" put. How would I reverse this, "sell to close" the put followed by another "sell to open" put?
I'm a newbie at this as you can tell. Just bought 1 call and 1 put, so damage done is minimal (I hope).
Actually, what you did there by accident was to enter into an option strategy called a long straddle. (Buying a call & put at the same strike price). Here is how that one works:
You basically use a straddle if you think the stock price will have a big move - you're just not sure whether it's up or down.
e.g. You think TSLA at $55 is a wrong value. Like the shorts, you think fundamentally the stock should be closer to $40, but unlike the shorts, you think Tesla has about an even chance of overcoming fundamentals and create a blow-out stock price. You think the CC on the 8th is going to cause a move into one or the other direction - but you don't know which.
So you:
a) Buy a May 10th $55 call at $2.75
b) Buy a May 10th $55 put for $3.40
And the two together costs you $6.15
Let's say you're right and after the earnings call:
1) TSLA tanks to $40. Your put would be worth $15, and your call would be worth $0. So you pocket $15 - $6.15 = $8.85
2) TSLA rises to $70. Your put would be worth $0, and your call would be worth $15. Again you pocket $15 - $6.15 = $8.85
If the stock price remains at $55 you will lose your $6.15. The price basically has to swing by $6.15 - i.e. lower than $48.85 or higher than $61.15 for you to make a profit.
I however wouldn't recommend that specific strategy using TSLA long options (did you end up buying JAN 2015 expiration date?). That swing that needs to be overcome for you to make a profit would be very high. (The cost is $30.2. That would mean you're betting that TSLA has even odds of hitting $24.80 and $85.20 within 2 years - just for you to break even, and that those odds are higher than it staying within that band. That would be highly speculative, and not in the same risk/reward category as that of the synthetic
long strategy).
If you do however reverse your put position today to move from a long straddle to a synthetic long, you may not be able to sell the put at the original price you would have gotten on Friday. The idea is to have the money you get from the put to pay for the call, with some left over. If that doesn't work out that well because you bough/sold at different times, don't let it dissuade you on the long run! But who knows, the 'put' price could also go up today if the stock price falls, so you may also be better off. Can't say though that I'm rooting for that to happen
