Put Options

The textbook definition of an option is as follows: The right, but not the obligation, to buy or sell a specified asset at a predetermined price over a predetermined time.

Buying a Putbuying-puts

Buying a put is a bearish strategy that requires a price drop in the underlying instrument (stock or ETF). Nonetheless, the most critical factor in trading puts profitably is an ability to predict the future price moves of the underlying instrument.

The investment return on a put is the profit or loss divided by the initial investment. The formula is the following:

Return = (profit or loss)/initial investment

For example, if you buy a S&P 500 (NYSE: SPY) option for $4 and sell it for $6, for a profit of $2, your return on investment is 50% (2 divided by 4 equals 0.5, or 50 percent). Annualizing the return will give you another perspective on the return. If this particular trade covered 3 month from beginning to end, you would have made a 200 percent annualized return.

However, in most cases, the return on investment is not the major criterion of buying a put. The main reason for buying is leverage. You can gain large percentage gains with a small investment. The low price of puts makes discussions of rates of return almost meaningless when examined on a trade by trade basis. Many of your trades may make 200 percent, but your losses may be 100 percent. These are large percentages simply because the initial investment is so low.

Selling a Put

Selling a put is a bullish strategy. Put sellers want the price of the underlying stock or ETF to rise so they may buy back the put at a lower price or simply let the instrument expire worthless. The ideal situation for a put seller is for the price of the stock or ETF to move above the put’s strike price at expiration, thus rendering the put worthless. The put seller will have captured all of the premium as profit.

A Bearish Iron Condor? In SPY?

As I always say, we, as options traders, have the ultimate advantage over other investors. Unlike most investors, we have the ability to structure our positions in a way that generates profits regardless of the direction of the underlying stock or ETF. Take for instance the iron condor: an options strategy that thrives when the market … Continue reading A Bearish Iron Condor? In SPY?

Higher, Higher, Higher We Go . . . A Short-Term Strategy for an Overheated Market

We’ve witnessed an incredible move in the S&P 500 (SPY) over the past few weeks. On March 25, the SPY traded at a low of roughly $383.50. As of the close on April 15, SPY was 8.4% higher at $415.87. An extreme move indeed. And it’s a move that has led to an extreme overbought reading in … Continue reading Higher, Higher, Higher We Go . . . A Short-Term Strategy for an Overheated Market

Buy the ‘Chinese Tesla’ (NIO) for 12.7% Less Than Market Price and Pocket $220

Are you a strong believer in the future of electric vehicles? If so, I have a wonderful way to buy what many analysts are calling the “Chinese Tesla.” The company . . . Nio (NYSE:NIO). I am offering a conservative way to bring in $220 every 43 days in NIO while having the ability to … Continue reading Buy the ‘Chinese Tesla’ (NIO) for 12.7% Less Than Market Price and Pocket $220

Contrarian? Bullish on Gold? You Need to Take a Look at this Strategy.

For those gold bugs out there, I have a different way to approach investing/trading in gold. The strategy for trading in gold is a twist on the standard poor man’s covered call strategy. The twist is this: Rather than buying one LEAPS contract and selling one near-term contract against the LEAPS, this approach buys two … Continue reading Contrarian? Bullish on Gold? You Need to Take a Look at this Strategy.

Protect Your Portfolio With This Favorite Hedge-Based Strategy

Over the past few weeks, readers of The Strike Price have bombarded me with questions about options strategies to help protect their portfolio. Now, this is somewhat of a loaded question because there are numerous strategies that can effectively hedge a portfolio. But admittedly, I do have a few favorites. For instance, if I want … Continue reading Protect Your Portfolio With This Favorite Hedge-Based Strategy

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