By writing a deep out of the money put option the investor is able to participate in a larger decrease in the stocks value; however, a further out of the money put option will provide a smaller amount of option premium. A Sauder School of Business Graduate specializing in Real Estate Finance with a vivid interest in the stock market and investment strategy. There are two types of option contracts – Call options and Put options. Say you have $1500, you would be able to cover shorting 3 shares.
How to choose the Strike Price?The strike prices used will depend on how bearish an investor is. If youhad owned the stock naked, then you would have lost threedollars since you owned the stock at $29.00 and it closed at$26.00 on expiration. However you also run the risk that the stock will continue to fly upwards and you miss out on that profit. One is to take small losses when they happen, and let your winners run.
In those rarecases, you will not want to roll the position, because itmight be called away if the call you sold is exercised when itbecomes in the money. With this particular strategy, you would purchase protective puts for stocks already owned in order to minimize any losses. There are 6 common Bearish Option Strategies implemented by investors: Long Put, Protected Short Sale, Covered Put Sale, Short Call, Bear Put Spread, and Bear Call Spread. If you want to read more about trading options, click over to David’s site at
In an ideal world, we would like to be able to clearly predict the direction of a stock. Say one candidate wants to increase taxes on milk and the other wants to decrease them. To be conservative you write put options with a strike price at the money ($120) for $6 each and an expiry in 1 month. They do not understand that options are on a higher, more sophisticated level when compared to stocks. The greater the bearishness of an investors forecast, the deeper in the money and further apart the strike prices should be.
You could assume that the stock price will be quite volatile, but since you don’t know the news in the annual report, you wouldn’t have a clue which direction the stock will move. This price is determined by factors including the stock price, strike price, time remaining until expiration (time value), and volatility. A Sauder School of Business Graduate specializing in Real Estate Finance with a vivid interest in the stock market and investment strategy. For example: write the XYZ June 30 Put and also write the XYZ June 30 call.
These are only a few of the most common ones. So, when you roll out your covered call or buy-write, you do itby doing a spread. An option is a derivative trading product that is best used by investors as a hedging tool providing profit protection and profit enhancement. You can sell Puts on Apple (AAPL) and received the option premium in exchange for the risk that the stock may decrease in value up to the expiration of the stock options you sell.
Picking an expiration month with a long enough duration for the stock price decrease to occur. I currently hold a B.COM and am working towards the CFA designation. For stock XYZ, let’s imagine the share price is now sitting at $63. Investors use this strategy when they think a large price more will occur in a stock but are unsure of which direction the stock will move.