Heed Lesson of Google Options

This column was originally published on RealMoney on Oct. 21 at 11:06 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.

Come behind the scenes with me to the opening trades in Google(GOOG), the wild ones that were in the $340s. Those trades were motivated by people who, moronically, had sold October $320, $330 and $340 calls and all in between, without any coverage. That's right, these bozos sold them naked because they thought that when you sell out-of-the-money premium, you make money, period.

As someone who used to trade options for a living, I have to tell you that this is a total sucker's game. However much you make selling premium naked most certainly will be given back by the 100-year storm, and then some, and the 100-year storm happens, oxymoronically, about three or four times a year.

Let's go into the mechanics. Say you are short the October $330 calls and you hear guys like me saying that the stock will go to $350. You can't trade the calls; they don't open till after the common opens. If the stock keeps going up, you are totally wrecked. You tried to make 4 points, but risked what feels like infinity.

So, what do you do? You can't buy them back until after rotation, so you buy common to close out the position. That puts you long common, short calls.

Now, we are in the awkward position, right now, of these same morons who bought the stock in the $340s kicking it out and trying to cover the $340s because they have giant losses if the common comes down.

I want this exercise to be a lesson to all who believe that selling out-of-the-monies is free money. Think about it, if you bought common in the $340s to take away the pain of the October $340 call sale, you now are losing much more than you could have made by selling the call.

That's just dumb.

I know brokers will keep talking people into doing this nonsense, but, what can I say? Remember the Google October expiration and heed its lessons!

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