- If TNA were to close above $41 a share on Friday, my losses would have been limited to the premium I paid for TNA
- If TNA were to close below $41 a share on Friday, I get my exercise and short the stock. Then last weekend, let's say news comes out which causes the market to rally hard, I would end up in bad shape because TNA would have opened much higher, but I would be sitting in a short position. (this is the real risk, it happened a few months ago when I tried something similar with Bank of America, luckily I had an offsetting position in Citibank which saved me)
Now for my history lesson:
Years ago, my friend and I were trading stocks with a hot shot stock broker in town. He was all into the high octane stocks. Trade after trade, we were making money (didn't have the good sense to realize we were in the midst of a market rally and everything was going up). Then one day, our broker told us we could make 10 times the money we were making with options. To this day, I'm not sure if I curse that day or not! Our eyes got big and instead of doing the same research we did before we got into stock investing, we took the 30 minute short course and dove into the deep end and we got burned bad. Really bad. I swore off options for years. Before you get into options realize this:
Our problem was not that we chose the wrong stocks, our timing was off.
With stocks time works with you. With options time works against you. With options, you can lose your shirt with no rags left, with stocks at least you have the rags!