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Long & Short Puts |
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Long Put
The more bearish you are as a trader, the more out-of-the-money (lower) the option should be. No other position allows as much leveraged advantage in a declining market. Profit increases as the market falls. At expiration the break-even point will be the option strike price minus the price paid for the option. For each point below the break-even, the profit grows an additional point. The loss is restricted to the amount paid for the option. Maximum loss occurs if the market ends above the option strike price. For each point below the break-even, the loss shrinks an additional point. The position is a wasting asset, so as time passes the value of the position erodes towards the expiration value. If volatility increases, erosion decreases; as volatility decrease, erosion accelerates.
Short Put
This is used when you honestly believe the market is not going down. If you think the market will only rise, sell in-the-money options for maximum profit; sell at-the-money options if you are convinced that the market will stagnate or rise; and sell out-of-the-money (lower strike) options if you are merely somewhat certain. Profit is limited to the premium received. At expiration, the break-even point is the strike price minus the premium received. Maximum profit is realized is the market settles at or above strike price. The loss increases as the market falls. At expiration, the losses increase by one point for every point the market is below the break-even. As this involves open-ended risk, the position must be watched closely. The position is a growing asset, so as time goes by the value of the position grows as the option loses its time value. The maximum rate for increasing profits occurs if the option is at-the-money.
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| Symbol |
Rate |
| GBP:CHF |
1.747703 |
| GBP:JPY |
155.484239 |
| GBP:USD |
1.638403 |
| NZD:USD |
0.627050 |
| EUR:CAD |
1.545998 |
| EUR:CHF |
1.516857 |
| EUR:GBP |
0.867915 |
| EUR:JPY |
134.947096 |
| EUR:USD |
1.421994 |
| AUD:JPY |
76.394373 |
| AUD:USD |
0.805000 |
| USD:CAD |
1.087204 |
| USD:CHF |
1.066711 |
| USD:JPY |
94.899879 |
| USD:SEK |
7.613010 |
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Disclimer: This website is for informational purposes only and is not intended to provide
specific commercial, financial, investment, accounting, tax, or legal advice.
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© ForexCenter.com, 2005, All Rights Reserved
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History