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Showing results for tags 'married put'.
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Dr. Edward Olmstead, Professor, Northwestern University Chief Options Strategist, Dr. Olmstead’s Options Trading Strategies There continues to be considerable interest in owning the stock of Facebook (FB) even though its performance has been a disappointment since its IPO in May. At its current level of $20.40, it might be a bargain, but it could also continue lower before it finds some significant support. Here is a cheap and safe way to own FB into January 2013 (and possibly beyond). This cheap and safe way to own FB into the beginning of 2013 uses a combination of options. Instead of buying the stock, a call option will used as a synthetic version of the stock that costs less than $6 per share while providing over 80% of the FB price movement. To protect the synthetic stock, a married put option will be used to limit loss in case the stock continues to move lower. Finally, the cost of the married put will be substantially reduced by selling a near-term strangle. Here are the details of the trade base upon a one contract position (100 shares): Buy 1 Jan (2013)16 call for $5.70 per share. Buy 1 Jan (2013) 20 put for $3.20 per share. To reduce the cost of the put, sell 1 Sept 22 call for $.90 per share and sell 1 Sept 18 put for $.70 a share. At the September expiration date (9/20), this trade will show a small profit if FB is trading between $18 and $26. After the September expiration date, this trade has the potential for unlimited profit with a maximum risk at the January expiration of only $3.30 per share. Actually, the maximum risk is less than $2.00 per share prior to the beginning of December. When the January expiration date is reached, you can continue following FB by repeating the synthetic stock/married put trade for another 5-6 months. You would also have the choice of buying FB stock for $16 per share. Dr. Olmstead can be found at http://www.olmsteadoptions.com, an on-line options trading site, centered around options education material and option trading strategies he’s developed. He is Professor of Applied Mathematics at Northwestern University, author of the popular and highly-praised options book, Options for the Beginner and Beyond (2006) and former chief strategist for The Options Professor on-line newsletter, distributed by Zacks.com and Forbes.com. -
Traders who enter married put strategies want to own an option's underlying asset, but are unsure if the asset's bullish trend will continue in the short-term. The strategy involves buying a put option ATM and buying the same number of regular shares of the underlying asset. When traders buy the put option, they are essentially purchasing insurance. The most a trader can lose is limited to the amount that he pays in premiums and the difference in the share price on paper. At the same time, there is no limit to how much an investor can gain, since the potential rise of any underlying asset is infinite. Definition of ATM, ITM and OTM for Married Puts There are three ways to define the relationship between a put option's strike price and the market price of its underlying asset. Understanding the differences between the terms is important because the risks involved in buying puts depend on these terms at the time of the purchase and when assigning assets. ATM - At The Money: The underlying asset's market price equals the option's strike price. Example: - Put Option XYZJan52 (strike price $52) - XYZ is trading at $52 ITM - In The Money: The underlying asset's market price is less than option's strike price. Example: - Put XYZJan52 (strike price $52) - XYZ is trading at $30 OTM - Out of The Money: The underlying asset's market price is more than option's strike price. Example: - Put Option XYZJan52 (strike price $52) - XYZ is trading at $70 How to Enter a Married Put Strategy (ATM) XYZ is worth $52 (market price) 1) Trader buys 100 shares of XYZ preferred stock and pays $5200. 2) Trader buys the put option: XYZJan50($2) - 100 shares of XYZ stock - Strike Price $50 (ATM), expiring in 30 days - Premium Cost of $2 3) Trader pays $200 in premiums (100 x $2 (premium cost)). Result one ITM: XYZ hits $30 (ITM) Any drop in price below $50 puts the option ITM. If this happens, the trader will exercise the right to sell his or her 100 shares for $50 and will receive $5000 from the put seller. The trader's total loss will equal the premiums paid ($200) plus the difference between the asset's purchase price and its selling price (Paid $5200 - Received $5000 = $200). In this case, the total loss is $400. Result two OTM: XYZ hits $70 (OTM) Any rise in price above $50 puts the option OTM. If this happens, the trader will not exercise the right to sell his or her 100 shares. His or her underlying asset will have a paper value of $1800 (100 (shares) x $70 (market price). The $200 in premiums paid reduces the trader's profit to $1600. Result three ATM: XYZ hits $52 (ATM) If XYZ remains at $52 when the put option expires, the trader will not exercise the right to sell his or her 100 shares, but loses the $200 in premiums paid (insurance). Advantage and Disadvantage of Implementing a Married Put Strategy: Pluses: The upside to this type of strategy is that there are no limits to the amount of profit an investor can make. If the underlying asset's market value takes off, the investor's shares will grow on paper. Another advantage in the married put strategy is that the cost of insurance (buying a put) is very low. As a result, a trader can go long and pay only a small fixed premium if things go wrong. Minuses: The downside in implementing a married put strategy is that the investor loses when the value of the option fall ITM. Although, the most an investor can lose is limited.
