Now I Remember
It just happened so fast, it’s like an awakening :). I mentioned in my earlier post that I forgot several techniques on executing a trade (in which becoming one of the basis of my re-training). In particular, I forgot on how to execute a Long Straddle. I do remember that Straddle is a strategy of buying 1 call and 1 put at the same strike (or not, it depends on your preference).
What I forgot is how do we cashed in? I monitored through my account several days ago that my trade on ADBE (Adobe, the creator of Photoshop, Illustrator, and many other software for designers) is going quite well. My buy call contract is showing a real deal (+$290 from a single contract) with my buy put, logically, went under (-$165). Several days ago I would calculate that my total profit is $125 (from 290-165, which is of course WRONG), the right profit calculations should be $290-the commision price.
Why? Because in buy put contracts, you are buying the rights to sell a certain stock at a certain price. There is, however, no obligations on executing it. So my buy put strike price is at $35 while ADBE current stock price is at $37. I have two options here:
- Execute the contract, meaning that I will loose $2 in each transaction (plus commission) because I have to buy the stock at $37 and sell it instantly at $35
- Wait the contract to expire which will delete that -$165 red ink from my balance statement.
Of course any logical traders and investors will choose the second options :). Remember, in buying a contract, we have the rights to buy or sell a stock, not an obligation to do so.
