Strategies

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Weekly Strategy Discussion

The Weekly Strategy Discussion is designed to assist individuals in learning how options work and in understanding various options strategies. Options involve risk and are not suitable for all investors. The strategies discussed are for educational and illustrative purposes only, and should not be construed as an endorsement, recommendation or solicitation to buy or sell securities. Commissions, taxes and transaction costs are not included. Please contact a tax advisor for the tax implications involved in these strategies.

Selling a Put

Example: XYZ stock is trading $50.

Outlook:You like XYZ stock and you would like to buy 100 shares on a 10% pullback.

Possible strategy:Sell one 30 day XYZ 45 strike put at $1.60.


*All values shown are at the time of expiration .Commissions and other trading fees not included.

Stock
Short 45 Put
Short 45 Put Profit (Loss)
Net Profit (Loss)
40
5
1.60
(3.40)
45
0
1.60
1.60
50
0
1.60
1.60
55
0
1.60
1.60
60
0
1.60
1.60

 


AT EXPIRATION
If the stock is above the 45 strike price the Put expires and you keep the $1.60.
If the stock is below the 45 strike price the Put most likely will be assigned and you would have an obligation to buy 100 shares at $45/share.
Your effective stock purchase price would be $43.40.

$45 - $1.60 Put Premium = $43.40



Break-even: XYZ at $43.40.

Max Loss: Stock ownership below $43.40.

IN SUMMARY: Selling Puts is a wonderful way to purchase stock on a pullback.But remember, the risk will lie in the ownership of the stock.




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