Strategies

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Buying Puts

 

ZYX is at or above $50 at expiration

chart 1

Say ZYX stock did not move as anticipated, but instead increased and closes at $57 per share at expiration. The ZYX put would expire out-of-the-money and with no value, so the investor would lose the total premium of $300 initially paid for the option. This would be the limited, maximum loss no matter how far ZYX stock had risen, and would also be realized if at expiration ZYX closed at any point at or above the $50 strike price and the put expired out-of-the-money.

Had the investor initially chosen a short sale of 100 ZYX shares as opposed to purchasing the $50 put when ZYX was trading at a price of $52, he would also incur a loss with ZYX trading at $57. However, the investor would have unlimited risk above this price level, and there is no theoretical limit as to how high a stock price can increase.

 
 

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