Update on Buying Options for Protection

My original posts defining calls and puts used some examples to show that options are essentially insurance contracts. I want to revisit these examples.

The examples were based on General Electric, whose recent stock price action hasn't been very good:


Susan was going to buy calls expiring in February instead of buying the stock directly. This is what happened to GE-BF, call striking at $30, deep in the money:

Her rationale for buying GE-BF was to lock a $30 buying price with the expectation that GE would be substantially higher than that before the 3rd Friday of February.

This is what has happened to GE-BG, at-the-money call with strike at $35:


This contract is now deep out-of-the-money and has lost 90% of its value, pretty much like a penny stock would typically do. Again, by buying GE-BG, she wished to lock a buying price of $35, which would not make sense any longer now.

John, on the other hand, was going to buy puts to lock a gain already made.

GE-OS, with strike at $37.5, was an in-the-money put and it is even more so after yesterday decline in GE stock price, with a 75% increase in premium:


GE-OG, put striking at $35, was at-the-money and it is now in-the-money, experiencing a 166% premium increase:


And GE-OZ, put striking at $32.5, which has remained out-of-the-money, has now gained 233%:



I will revisit these positions later next month.

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