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 to Buy Stock

Example:                 XYZ stock is trading at $50 

Outlook:                  You like XYZ and 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:

  • Maximum Profit = Premium received for sale of Put
  • Maximum Profit = $1.60
  • Breakeven = Short Put strike price - Premium received
  • Breakeven = 45 - $1.60 = $43.40
  • Maximum Loss = Stock ownership below $43.40

In Summary: Selling one Put obligates you to purchase 100 shares of stock if you are assigned to do so.  The premium received for the sale of the Put lowers your cost basis for the stock.

CBOE Volatility Index (VIX)