Outlook: Bullish
A put is an option to sell. You buy a put, you have the right to sell stock to put writer at the strike price. As a put writer, you have the obligation to buy the stock if option being exercised.
Short (Naked) Put is an alternative way of buying a stock at price cheaper than market current price.
Put Buyer: expect stock price fall below the strike price,
Put Writer: expect stock price rise or stay sideways.
Strategies...
- Select stock with adequate liquidity.
- Sell put option below current stock price.
- Short the put option with a maximum of one month to expiration.
Example...
Amylin Pharmaceuticals, Inc.(NASDAQ:AMLN) is trading at $28 on May 25, 2012.
Sell the June 2012 $25 put option for $0.35 per share.
 |
| Short Put |
Stock price rise to $30...
- June $25 put option: Not exercised by buyer , $0
- Premium gain: $0.35
- Profit : $0.35
Stock price is traded at $24.65...
- June $25 Put: Exercised by buyer, loss $0.35
- Premium gain: $0.35
- Profit : $0.35 - $0.35 = $0
Stock price is traded at $20...
- Jun $25 Put: Exercised by Put Buyer, loss $5
- Premium gain: $0.35
- Profit : -$5.00 + $0.35 = -$4.65
Maximum Profit : $0.35 per share (put premium)
Maximum Loss : $25.00-$0.35 = $24.65 (Strike Price - Put Premium)
Breakeven : Stock traded at price $24.65
The worst outcome, stock falls to zero, put writer obligates to purchase the stock at the strike price. Minus the put premium received earlier, the maximum loss is the difference of strike price and put premium.
No comments:
Post a Comment