TO PUT OR NOT TO PUT… THAT IS THE QUESTION WHETHER ‘TIS NOBLER IN THE MIND TO PUT THE PHONE DOWN, OR JUST KEEP CALLING…
11.13.10 PUT OPTIONS What are Put Options? A Put is a contract on a particular stock, index or other security that allows the investor to sell the underlying stock at a set price (strike price). The holder of his option has paid a premium (cost of the contract) to buy it. Put options are profitable when the market is in decline. If the investor has a put on a stock that has now fallen enough to cover the cost of the premium, the person would be profitable. Ways to Profit with Put Options Trading them: If the Put is profitable, the investor can sell or trade the contract back to the market. The profit on the contract is shown by the premium increase on the option. As the market declines, the premium increases. This premium increase allows the investor to sell the contract. He is not "exercising the option". He is trading it out. This is how most options are done vs. exercising.
A PUT Option gives you the right to sell a set number of shares of stock at a given price until the option expires at the expiration date.
Selling a PUT You can sell a Put option to purchase shares at a the Investor at today’s price. Sell a Put for stock at $50 strike to be exercised at any time until expiration. If the stock stays the same or increases you will not be exercised and you keep the Premium at expiration. If the stock moves down, you may be called to buy the stock at your strike price. (Higher Than market.
An important note: Selling a Call If the Stock stays the same or decreases, You keep the money you paid for the Call. However, If the stock goes up, you may be called to deliver the Stock at the lower strike price.
“Exercising” them: When an investor exercises a Put Option, he or she is selling a stock they already own. The right of a put holder is the right to sell the stock at the strike price, regardless of the actual price in the market. If you owned a Put with a strike price of 50, and the market has declined to 40, you could purchase the actual the stock in the market at 40 and then exercise the put at 50. You would make 10 points on that stock, minus the premium paid. [ $1000 for 100 shares, minus the $300 = $700 profit.] The break-even for investors who own put options (disregarding commissions) is the strike price minus the premium paid. In the above example, if the investor paid $300 for the option - his break-even would be 47. Since the market in our example went down to 40, the actual profit for that person would be $700.
Writing [SELLING] a Put Option When you sell or short a put option, you are "writing" the contract. The writer is someone who is bullish on the market. The seller collects the premium (as opposed to the buyer who pays the premium) and is hoping the option expires worthless. The premium is the writer's maximum gain. So, obviously if the premium is all that he can make - having the option expire is the best case scenario. Put option writing [SELLING] does carry risk. If the option is exercised (by the holder/buyer – the other side), the writer must purchase the stock from the holder at the strike price. In the example above, the writer would have had to buy the stock at $50 (the current price), while the market was at $40. He would be stuck with a stock 10 points above the market. His loss would be lessened by the premium received. The writer can buy back the put before it is exercised, but if the put has gained value, the purchase price would be higher than the premium he originally got - so, it would be a loss either way. The option is expiring is the best bet.
A note about “selling” puts (and calls). When selling or writing a put, since the puts go up in value as the stock moves down, you don’t want the stock to move down, because then the put will be higher in value, and you will pay more to buy it back, and lose the credit you received whenyou “sold” the put. For example, if a put was “selling” at $10.00 when the stock was, say $200, and the stock dropped to maybe $150, the Put will go up to maybe $12.00. so you would lose $2.00 or $200 on 100 contracts when you BOUGHT the PUT when closing out. Similarly, when “selling” a Call, you really want the stock to go DOWN, so the Call decreases in value. Then when you “close out,” the Call will be at a lower price, and you will keep the difference in premium paid.
Covered Put Option Writing Since the seller or writer of puts must purchase the underlying stock at the strike price, he must have the cash to do that. Selling stock short and using the proceeds to cover an exercised option can be done. Also, the premium received for selling the put option can assist a short position to get greater profit. As with any option, time is the biggest factor. Put options expire monthly. All options carry large risks, but can present large profits. Educate yourself further and talk to your broker.
M-STREETBOYS OPTIONS “Time decay” Usually 7 to 10 days…. 4 to 7 weeks $$ Value Time Expiration Acquire an Option at least 4 to 7 weeks ahead of expiration Get Rid Of an Option at least 7 to 10 days ahead of expiration
BULL PUT CREDIT SPREAD STOCK SHOULD GO UP Sell a PUT, Buy PUT below Max profit is net Credit Margin requirement is delta strike prices Max Loss is the delta strike, minus net CREDIT.
BULL PUT CREDIT and BEAR CALL CREDIT Bull and bear credit spreads offer a trader a limited-risk strategy with limited profit potential. The key advantage to credit spreads is that in order to win they don't require strong directional movement of the underlying. This is because the trade profits from time-value decay. Vertical credit spreads can thus profit if the underlying remains in a trading range (stationary), freeing the trader from problems associated with market timing and prediction of the direction of the underlying.
CLEAR AS CRYSTAL, NOW, ISN’T IT ?