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.

Buying a Put

Example:                 XYZ stock is trading at $36

Outlook:                  You are bearish on XYZ stock over the next few weeks and would like to profit on your forecast with limited risk.

Possible strategy:    Buy 1 XYZ July 35 Put at $2.25

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

Stock

Long 35 Put

Long 35 Put
Initial Cost

Net Profit (Loss)

45

0

(2.25)

(2.25)

40

0

(2.25)

(2.25)

35

0

(2.25)

(2.25)

30

5

(2.25)

2.75

25

10

(2.25)

7.75

 

 

At Expiration:

  • Maximum Profit = Significant on the downside
  • Breakeven = Strike Price - Premium Paid
  • Breakeven = $32.75
  • Maximum Loss = Total Premium Paid
  • Maximum Loss = $2.25 ($225)

In Summary: The purchase of a Put may be a strategy to consider should you anticipate a significant decline in the stock.  Have a timeframe in mind to realize your bearish forecast.  Risk is limited to the total premium paid for the Put.  Profit potential is theoretically limited.

CBOE Volatility Index (VIX)