Option Volatility & Pricing: Advanced Trading Strategies and Techniques is a book written by Sheldon Natenberg. He is an experienced option trader. His trading career began in 1982 as an independent market maker in equity options at the Chicago Board Options Exchange. He is also an independent floor trader, and an educator. As an educator, he has conducted seminars for option traders around the world.
Option Volatility & Pricing is one of the most widely read books among active option traders around the world. In the book, you will learn Volatility concept, Pricing models, Basic and advanced trading strategies and Risk management techniques.
The book is written in a clear, easy-to-understand fashion. It points out the key concepts essential to successful trading based on his experience in trading. Sheldon Natenberg used both the theory and reality of option trading on this book. Option Volatility & Pricing teaches you to use the right strategy that best fits your view of market conditions and individual risk tolerance.
Friday, October 1, 2010
Monday, September 20, 2010
Options Writing Strategies
The book, Options Writing Strategies for Extraordinary Returns is written by David Funk. The book is superbly written and is about call and put option writing techniques which can be used by investors so that they can make profits from the market irrespective of the direction the market is moving in. The book has options writing strategies for selling options short, tips to use charts and tables and then helps investors to buy stocks by building a three legged model. Apart from these techniques there are some additional amazing features in this book for options writing strategies. The book also lists the option tools that are available online and also the step which the investors can take to take advantage of the volatility in the markets.
All the features in the book are very useful for all investors as it helps them to know of all the options writing strategies using which they are able to invest in a much better way and earn more profits of the market. The content of the book is written in a concise and clear way which makes it easy for everyone to read. The way it has been taught to make the strategies in the book is excellent and thus, provides benefits to all investors who read the book. The book helps the investors to deal with the stubborn situations of the market. The investment strategies in the books are extremely sophisticated and as they are written in a simple and clear way, it can be understood by all very easily. The strategies reduce the risk that the investor faces in the market and thus, help them to increase their earnings from the market. Irrespective of the way the market swings, all investors can easily use the strategies and invest amicably and earn profits.
Read more detail on Options Writing Strategies for Extraordinary Returns
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All the features in the book are very useful for all investors as it helps them to know of all the options writing strategies using which they are able to invest in a much better way and earn more profits of the market. The content of the book is written in a concise and clear way which makes it easy for everyone to read. The way it has been taught to make the strategies in the book is excellent and thus, provides benefits to all investors who read the book. The book helps the investors to deal with the stubborn situations of the market. The investment strategies in the books are extremely sophisticated and as they are written in a simple and clear way, it can be understood by all very easily. The strategies reduce the risk that the investor faces in the market and thus, help them to increase their earnings from the market. Irrespective of the way the market swings, all investors can easily use the strategies and invest amicably and earn profits.
Read more detail on Options Writing Strategies for Extraordinary Returns
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Monday, September 13, 2010
Selling naked put
Lee Lowell wrote a great book on option trading “Get Rich with Options: Four Winning Strategies Straight from the Exchange Floor“. He is one of America’s leading options professionals. Lee spent six years in the options market as a market maker on the floor of the New York Mercantile Exchange (NYMEX) in New York City. He has his own office-based trading firm where he trades commodity, stock & index options on a daily basis.
One of the strategy I like from the book is selling naked puts. Naked put is an option put where the option writer does not have a position in the underlying stock. This strategy is used when you want to buy stock, but you think the price is too high. By writing a put, you will get a premium. If the stock price rise, you will keep the premium, but if the stock drop, you can buy the stock at strike price.
You can see that the potential profit is limited to the option premium, and the potential loss is unlimited if the stock falls all the way to zero. So this strategy is very dangerous if you didn’t know what you are doing.
The key of this strategy is very simple. A smart put-option seller will only sell put option contracts at a strike prices at which you would like to buy the stock. The secret is to pick a stock that you would like to own at a cheaper price than it is now. Here’s what I do, I look for stocks that just rise because of good earning result. Since the price has rise, I want to buy it at lower price, so I just write a put option at lower strike price and wait until it expires.
One of the strategy I like from the book is selling naked puts. Naked put is an option put where the option writer does not have a position in the underlying stock. This strategy is used when you want to buy stock, but you think the price is too high. By writing a put, you will get a premium. If the stock price rise, you will keep the premium, but if the stock drop, you can buy the stock at strike price.
You can see that the potential profit is limited to the option premium, and the potential loss is unlimited if the stock falls all the way to zero. So this strategy is very dangerous if you didn’t know what you are doing.
The key of this strategy is very simple. A smart put-option seller will only sell put option contracts at a strike prices at which you would like to buy the stock. The secret is to pick a stock that you would like to own at a cheaper price than it is now. Here’s what I do, I look for stocks that just rise because of good earning result. Since the price has rise, I want to buy it at lower price, so I just write a put option at lower strike price and wait until it expires.
Thursday, September 9, 2010
Income generating option strategies
Income generating option strategies is an option strategies that makes money when you enter the position. The income is generated when you sell option, either selling put option or buying put option. Here are some strategies to consider:
- Selling naked puts. You will get income by selling put. This is a perfect strategy if you want to buy stocks at lower price. Selling naked puts is a bullish strategy.
- Covered Call. Covered Call is an options strategy where an investor holds a long position in an asset or stock and writes call options on the same asset. This strategy is used when investor has neutral to bullish overview of underlying stock. Although they believe it has bullish overview in long term, investor also believe it will only have limited price change during the contract life or short term. So to gain additional income they sell call option.
- Iron condor options. Iron Condor has minimal risk and higher probability of success. With Iron Condor, you don't need to guess the direction of stock. This strategy is used when we have a neutral outlook on stock. You will make money if the price don't move much. It's a good idea to implement this strategy on security (stock) with low volatility, because their price tend not to move much. The bull put spread is implemented by selling an in-the-money (ITM) put option (has higher price) and buying an out-of-the-money (OTM) put option (has lower price) on the same underlying stock with the same expiration date. While the bear call spread strategy is implemented by selling an in-the-money (ITM) call option (has higher price) and buying an out-of-the-money (OTM) call option (has lower price) on the same underlying stock with the same expiration date. Both bull put spread and bear call spread has limited profit and risk.
Sunday, August 15, 2010
Option trading strategies
When we are talking about option trading, we usually talks about short term trading. Short term trading means we will rely heavily on technical analysis. Technical is based on price history. Those history is reflected through charts. Technical analysis tells us when price will likely to move. Chart pattern in technical analysis is used because we assume that trend tend to repeat itself.
Chart pattern is a formation on stock chart which shows signs of future price movements. It shows the relation between price and time. There are many types of charts like line chart which only shows closing price, bar charts which shows high, low, opening, and closing price.
There are a lot of chart patterns that you can learn and there are so many of them. You might hear about these pattern: Hanging man, Shotting star, Inverted hammer, Bullish and Bearish Engulfing, Bearish and Bearish Harami, Pearsing Line, Dark cloud, Abondoned Baby, Three White Soldiers and Three Black Crows. If not don't worry, I don't know much about them too. I don't use them. It's like having lots of weapon, so much that we don't know which to use. I really more on support and resistance line.
Support is a price level that the price of a stock will tend to stop going down and resistance is a price level that the price will tend to stop going up. When the price breaks the support line, it usually will go lower, and when price breaks the resistance line, it will usually go higher. Most of the breaks out are for real, but you should also watch out false break out.
In addition, you also needs to learn about chart indicators like Williams %R, MACD, the Relative Strength Index (RSI), Stochastics and Fibonacci Retracement Lines to help you in your trading decisions. These indicators will act as confirmation for your trading.
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Chart pattern is a formation on stock chart which shows signs of future price movements. It shows the relation between price and time. There are many types of charts like line chart which only shows closing price, bar charts which shows high, low, opening, and closing price.
There are a lot of chart patterns that you can learn and there are so many of them. You might hear about these pattern: Hanging man, Shotting star, Inverted hammer, Bullish and Bearish Engulfing, Bearish and Bearish Harami, Pearsing Line, Dark cloud, Abondoned Baby, Three White Soldiers and Three Black Crows. If not don't worry, I don't know much about them too. I don't use them. It's like having lots of weapon, so much that we don't know which to use. I really more on support and resistance line.
Support is a price level that the price of a stock will tend to stop going down and resistance is a price level that the price will tend to stop going up. When the price breaks the support line, it usually will go lower, and when price breaks the resistance line, it will usually go higher. Most of the breaks out are for real, but you should also watch out false break out.
In addition, you also needs to learn about chart indicators like Williams %R, MACD, the Relative Strength Index (RSI), Stochastics and Fibonacci Retracement Lines to help you in your trading decisions. These indicators will act as confirmation for your trading.
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Wednesday, August 11, 2010
Option Strategies
An option is a contract giving the buyer the right to buy or sell an underlying asset like stock at a fixed price on or before a certain expiration date. Remember this is a right and not obligation. There are basically two types of option contracts: Call options and Put options. A Call gives the buyer the right to buy the underlying asset, while a Put gives the buyer the right to sell the underlying asset.
The basic strategy for option trading is call and put. When you believe that a stock if going to be up, buy call option. But if you believe the price will go down, buy put option.
You can create advanced option strategy by combining the two basic option contract. For example you can create a new option strategy by buying one put option and selling another put option with different expiration date and strike price. Each strategies will have different characteristic, so you need to understand the profit and loss probability of a combination.
There are also option strategy that can generate income. This happens when you are selling an option contract at higher price and buy another option contract at lower price. For example you can sell a put option for $100 and buy another put option for $80, making $20 profit. The most popular income option strategy are Iron Condor. It is constructed by combining Bull Put Spread and Bear Call Spread. Bull Put Spread is constructed by selling an in-the-money (ITM) put option (higher price) and buying an out-of-the-money (OTM) put option (lower price) on the same stock with the same expiration date. While Bear Call Spread is constructed by selling an in-the-money (ITM) call option (higher price) and buying an out-of-the-money (OTM) call option (lower price) on the same stock with the same expiration date. With Iron Condors you don't have to guess the direction of a stock. This strategy is mostly used when we have a neutral outlook of a stock.
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The basic strategy for option trading is call and put. When you believe that a stock if going to be up, buy call option. But if you believe the price will go down, buy put option.
You can create advanced option strategy by combining the two basic option contract. For example you can create a new option strategy by buying one put option and selling another put option with different expiration date and strike price. Each strategies will have different characteristic, so you need to understand the profit and loss probability of a combination.
There are also option strategy that can generate income. This happens when you are selling an option contract at higher price and buy another option contract at lower price. For example you can sell a put option for $100 and buy another put option for $80, making $20 profit. The most popular income option strategy are Iron Condor. It is constructed by combining Bull Put Spread and Bear Call Spread. Bull Put Spread is constructed by selling an in-the-money (ITM) put option (higher price) and buying an out-of-the-money (OTM) put option (lower price) on the same stock with the same expiration date. While Bear Call Spread is constructed by selling an in-the-money (ITM) call option (higher price) and buying an out-of-the-money (OTM) call option (lower price) on the same stock with the same expiration date. With Iron Condors you don't have to guess the direction of a stock. This strategy is mostly used when we have a neutral outlook of a stock.
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Friday, August 6, 2010
Make money with iron condor
Most option strategies are are centered around making the right call on the direction of a stock. This approach relies on the accuracy of guessing the direction of the stock. Thus the chances of profiting are low. By using a combination of Bull and Bear Credit Spread, an Iron Condor position can be created. It will have minimal risk and higher probability of success. With Iron Condor, you don’t need to guess the direction of stock. This strategy is mostly used when we have a neutral outlook on the movement of the options underlying security. It’s a good idea to implement this strategy on security (stock) with low volatility, because their price tend not to move much.
Iron Condors is usually used by traders who seek income from their trading capital. They will construct the posistion so that it will still profit for a much more price movement. For example if the current price is $40, instead of creating a position where it will profit when the price moves up/down $10 (price between $30 – $50), a trader can create a position where he can still profit when the price moves up/down $20 (price between $20 – $60).
By using this strategy, trader would generate monthly income.
Since it is from a combination of bull put spread and a bear call spread, you need to understand them first. The bull put spread is implemented by selling an in-the-money (ITM) put option (has higher price) and buying an out-of-the-money (OTM) put option (has lower price) on the same underlying stock with the same expiration date. While the bear call spread strategy is implemented by selling an in-the-money (ITM) call option (has higherice) and buying an out-of-the-money (OTM) call option (has lower price) on the same underlying stock with the same expiration date. Both bull put spread and bear call spread has limited profit and risk.
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Iron Condors is usually used by traders who seek income from their trading capital. They will construct the posistion so that it will still profit for a much more price movement. For example if the current price is $40, instead of creating a position where it will profit when the price moves up/down $10 (price between $30 – $50), a trader can create a position where he can still profit when the price moves up/down $20 (price between $20 – $60).
By using this strategy, trader would generate monthly income.
Since it is from a combination of bull put spread and a bear call spread, you need to understand them first. The bull put spread is implemented by selling an in-the-money (ITM) put option (has higher price) and buying an out-of-the-money (OTM) put option (has lower price) on the same underlying stock with the same expiration date. While the bear call spread strategy is implemented by selling an in-the-money (ITM) call option (has higherice) and buying an out-of-the-money (OTM) call option (has lower price) on the same underlying stock with the same expiration date. Both bull put spread and bear call spread has limited profit and risk.
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Saturday, July 24, 2010
Covered Call
Covered Call is an options strategy where an investor holds a long position in an asset or stock and writes (sells) call options on the same asset. This is also known as a "buy-write" strategy if this stock is purchased simultaneously when writing the call. Usually the stock is held in the same brokerage account from which the investor writes the option call.
This strategy is used when investor has neutral to bullish overview of underlying stock. Although they believe it has bullish overview in long term, investor also believe it will only have limited price change during the contract life or short term. So to gain additional income they sell call option.
This strategy can only offer limited protection from a decline in stock price and also limited profit when stock increase in price because it will need to cover the option. Investor can also get the benefits of underlying stock ownership, like dividends and voting rights.
To summarize it, covered call has limited profit and substantial loss probability. Maximum profit will happen if the price of stock you own is at or above the call option's strike price. Substantial loss will occur when stock price continues to decline with the written call expires. You can calculate your loss as the start stock price less its current market price, less the premium received from the sale of call option. Any loss from the stock is offset by the call option premium.
This strategy is often considered as conservative strategy. But this is not true. To have a profitable covered call strategy, investor need to guess correctly that share values will not drop significantly. I can say that this strategy is very dangerous because if stock sanks you could lose many money. So use this strategy when you are very certain that the price won't move a lot.
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This strategy is used when investor has neutral to bullish overview of underlying stock. Although they believe it has bullish overview in long term, investor also believe it will only have limited price change during the contract life or short term. So to gain additional income they sell call option.
This strategy can only offer limited protection from a decline in stock price and also limited profit when stock increase in price because it will need to cover the option. Investor can also get the benefits of underlying stock ownership, like dividends and voting rights.
To summarize it, covered call has limited profit and substantial loss probability. Maximum profit will happen if the price of stock you own is at or above the call option's strike price. Substantial loss will occur when stock price continues to decline with the written call expires. You can calculate your loss as the start stock price less its current market price, less the premium received from the sale of call option. Any loss from the stock is offset by the call option premium.
This strategy is often considered as conservative strategy. But this is not true. To have a profitable covered call strategy, investor need to guess correctly that share values will not drop significantly. I can say that this strategy is very dangerous because if stock sanks you could lose many money. So use this strategy when you are very certain that the price won't move a lot.
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Saturday, July 10, 2010
Long call
In option trading there are two player, the seller and the buyer. If you buy a call, that means you are having long call position. Long call gives the owner the right to buy the underlying asset in the contract, but not an obligation.
For example, Alan and Tom agreed on a call options contract where Alan will buy from Tom, 100 shares (equivalent to one option) of Company XYZ at $20 which will expire on the third Friday of September. We call the $20 as strike price. Currently the price of stock XYZ is $25. He bought the option for $5. This is called the Option Premium.
At the expiry date or also called maturity date, the share price of Company XYZ remains at $25. Alan can exercise his right to buy the share for $20 and make $5 profit. If the share price goes down to $21, Alan can still profit $2 by simply exercising his rights.
The Long Last Call
However, if stock XYZ price goes down below $20 on the maturity date, for example drop to $15. The option will be too expensive for Alan so he can ignore the contract. If he wants to buy the stock, he can just buy it from the market. He don't need to exercise the option. In this case, Alan will only lose the amount he paid for the contract which is $5. Tom, on the other hand will keep the stock and the premium, which is his profit.
A long call is a bullish strategy. Trader will enter the position if he thinks the price will go up. This is a basic strategy and the most common choise for option trader beginner.
With long call, your loss will be limited to the premium paid up front for the option, and your gain will be unlimited depends on how much the stock rallies.
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For example, Alan and Tom agreed on a call options contract where Alan will buy from Tom, 100 shares (equivalent to one option) of Company XYZ at $20 which will expire on the third Friday of September. We call the $20 as strike price. Currently the price of stock XYZ is $25. He bought the option for $5. This is called the Option Premium.
At the expiry date or also called maturity date, the share price of Company XYZ remains at $25. Alan can exercise his right to buy the share for $20 and make $5 profit. If the share price goes down to $21, Alan can still profit $2 by simply exercising his rights.
The Long Last Call
However, if stock XYZ price goes down below $20 on the maturity date, for example drop to $15. The option will be too expensive for Alan so he can ignore the contract. If he wants to buy the stock, he can just buy it from the market. He don't need to exercise the option. In this case, Alan will only lose the amount he paid for the contract which is $5. Tom, on the other hand will keep the stock and the premium, which is his profit.
A long call is a bullish strategy. Trader will enter the position if he thinks the price will go up. This is a basic strategy and the most common choise for option trader beginner.
With long call, your loss will be limited to the premium paid up front for the option, and your gain will be unlimited depends on how much the stock rallies.
Learn option strategies and make profit now. If you want to learn more about option join stock option newsletter.
Sunday, July 4, 2010
Put option
Put option strategy
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In put options, the buyer has the right to sell an asset to the writer (the seller). Just like the call asset, it is bounded by a contract which states that the underlying asset will be sold at a particular price and a particular date. But the similarity ends there. In put options, the writer has to buy the underlying asset at the strike price if the buyer exercises this option.
Let us continue with John and Tom. John bought call options from Tom. But he could also buy put options from Tom. If John buys put options, it means that he buys the right to sell Company A’s shares at $20 on April 1. If the price of shares goes down below $20 on the expiry date, John can exercise his right and can still sell it at $20, thus making a profit.
Buying put option allows investors to earn when price of shares drops at the end of the contract.
Profit potentials are unlimited for the buyers of put options, especially if the market begins to sell off. On the other hand, risks are limited if the market goes against them.
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In put options, the buyer has the right to sell an asset to the writer (the seller). Just like the call asset, it is bounded by a contract which states that the underlying asset will be sold at a particular price and a particular date. But the similarity ends there. In put options, the writer has to buy the underlying asset at the strike price if the buyer exercises this option.
Let us continue with John and Tom. John bought call options from Tom. But he could also buy put options from Tom. If John buys put options, it means that he buys the right to sell Company A’s shares at $20 on April 1. If the price of shares goes down below $20 on the expiry date, John can exercise his right and can still sell it at $20, thus making a profit.
Buying put option allows investors to earn when price of shares drops at the end of the contract.
Profit potentials are unlimited for the buyers of put options, especially if the market begins to sell off. On the other hand, risks are limited if the market goes against them.
Call option
Call option strategy
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In simple terms, call options give the owner the right to buy the underlying asset in the contract. Again, it is not an obligation.
For example, John and Tom agreed on a call options contract wherein John will buy from Tom, 100 shares (equivalent to one option) of Company A at $20 (strike price) what will expire on the third Friday of April. The current price of the share is $20.
At the expiry date (also called maturity date), the share price of Company A remains at $25. John can then exercise his right to buy the share for $20 and thus, yielding $5. Meanwhile, if the share price goes down to $22, John can still earn $2 by simply exercising his rights as stated in the contract. In whichever way, any amount higher than the strike price at the end of the contract will become the profit of the owner. But before it can happen, the owner who decides to pursue his right has to have his money ready to pay for the amount.
However, if the share price goes down below $20, say $18, on the maturity date, it will be too expensive for John so he can just ignore the contract since he is not obliged to carry it out. He will only lose the amount he paid for the contract called the Option Premium. Tom, on the other hand will keep the asset and the premium, which in a sense, is his profit.
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In simple terms, call options give the owner the right to buy the underlying asset in the contract. Again, it is not an obligation.
For example, John and Tom agreed on a call options contract wherein John will buy from Tom, 100 shares (equivalent to one option) of Company A at $20 (strike price) what will expire on the third Friday of April. The current price of the share is $20.
At the expiry date (also called maturity date), the share price of Company A remains at $25. John can then exercise his right to buy the share for $20 and thus, yielding $5. Meanwhile, if the share price goes down to $22, John can still earn $2 by simply exercising his rights as stated in the contract. In whichever way, any amount higher than the strike price at the end of the contract will become the profit of the owner. But before it can happen, the owner who decides to pursue his right has to have his money ready to pay for the amount.
However, if the share price goes down below $20, say $18, on the maturity date, it will be too expensive for John so he can just ignore the contract since he is not obliged to carry it out. He will only lose the amount he paid for the contract called the Option Premium. Tom, on the other hand will keep the asset and the premium, which in a sense, is his profit.
Saturday, July 3, 2010
Bear call spread
Bear call spread
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The bear call spread strategy is used when we thinks that the price of underlying asset will go down moderately in near term. If you think the price will go down a lot, I suggest don’t use this strategy. There are better strategy for that condition. It is implemented by selling an in-the-money (ITM) call option (has higher price) and buying an out-of-the-money (OTM) call option (has lower price) on the same underlying stock with the same expiration date. bear call spread has limited profit and risk. This type of strategy is known as credit spread where you will get income when entering the position. The amount received by selling higher strike call option is higher than the cost of purchasing call with lower strike.
To understand better, here’s an example. Stock XYZ is trading at $40, and we think it is going to drop soon moderately, so we enter a bear call spread by buying a September 45 call for $100 and writes a September 35 call for $300. Thus, we receives a net credit of $200 when entering this position.
If XYZ begins to drop and closes at $34 on expiration date, both options expire worthless and we keep the entire credit of $200 as profit. This is the maximum profit you can get.
If XYZ goes up to $46, both options expire in-the-money. The September 35 call will have an intrinsic value of $700 and the September 45 call will have an intrinsic value of $200. This means that the position is now worth $500 at expiration or $500 loss. Since we had received a credit of $200 when entered the spread, our net loss comes to $300. This is the maximum loss you can have.
The above example did not take commission charges for easy understanding. But you must know the profit and loss also depends on the commision from your brokerage.
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The bear call spread strategy is used when we thinks that the price of underlying asset will go down moderately in near term. If you think the price will go down a lot, I suggest don’t use this strategy. There are better strategy for that condition. It is implemented by selling an in-the-money (ITM) call option (has higher price) and buying an out-of-the-money (OTM) call option (has lower price) on the same underlying stock with the same expiration date. bear call spread has limited profit and risk. This type of strategy is known as credit spread where you will get income when entering the position. The amount received by selling higher strike call option is higher than the cost of purchasing call with lower strike.
To understand better, here’s an example. Stock XYZ is trading at $40, and we think it is going to drop soon moderately, so we enter a bear call spread by buying a September 45 call for $100 and writes a September 35 call for $300. Thus, we receives a net credit of $200 when entering this position.
If XYZ begins to drop and closes at $34 on expiration date, both options expire worthless and we keep the entire credit of $200 as profit. This is the maximum profit you can get.
If XYZ goes up to $46, both options expire in-the-money. The September 35 call will have an intrinsic value of $700 and the September 45 call will have an intrinsic value of $200. This means that the position is now worth $500 at expiration or $500 loss. Since we had received a credit of $200 when entered the spread, our net loss comes to $300. This is the maximum loss you can have.
The above example did not take commission charges for easy understanding. But you must know the profit and loss also depends on the commision from your brokerage.
Bull Put Spread
Bull Put Spread
June 27th, 2010 | admin | 4 Comments#comments">4 Comments
The bull put spread strategy is used when we thinks that the price of underlying asset will go up moderately in near term. If you think the price will rise a lot, I suggest don’t use this strategy. There are better strategy for that condition. It is implemented by selling an in-the-money (ITM) put option (has higher price) and buying an out-of-the-money (OTM) put option (has lower price) on the same underlying stock with the same expiration date. Bull put spread has limited profit and risk. This type of strategy is known as credit spread where you will get income when entering the position. The amount received by selling higher strike put option is higher than the cost of purchasing put with lower strike.
To understand better, here’s an example. Stock XYZ is trading at $40, and we think it is going to rally soon moderately, so we enter a bull put spread by buying a September 35 put for $100 and writes a September 45 put for $300. Thus, we receives a net credit of $200 when entering this position.
If XYZ begins to rise and closes at $46 on expiration date, both options expire worthless and we keep the entire credit of $200 as profit. This is the maximum profit you can get.
If XYZ decline to $34, both options expire in-the-money. The September 35 call will have an intrinsic value of $200 and the September 45 call will have an intrinsic value of $700. This means that the position is now worth $500 at expiration or $500 loss. Since we had received a credit of $200 when entered the spread, our net loss comes to $300. This is the maximum loss you can have.
The above example did not take commission charges for easy understanding. But you must know the profit and loss also depends on the commision from your brokerage.
June 27th, 2010 | admin | 4 Comments#comments">4 Comments
The bull put spread strategy is used when we thinks that the price of underlying asset will go up moderately in near term. If you think the price will rise a lot, I suggest don’t use this strategy. There are better strategy for that condition. It is implemented by selling an in-the-money (ITM) put option (has higher price) and buying an out-of-the-money (OTM) put option (has lower price) on the same underlying stock with the same expiration date. Bull put spread has limited profit and risk. This type of strategy is known as credit spread where you will get income when entering the position. The amount received by selling higher strike put option is higher than the cost of purchasing put with lower strike.
To understand better, here’s an example. Stock XYZ is trading at $40, and we think it is going to rally soon moderately, so we enter a bull put spread by buying a September 35 put for $100 and writes a September 45 put for $300. Thus, we receives a net credit of $200 when entering this position.
If XYZ begins to rise and closes at $46 on expiration date, both options expire worthless and we keep the entire credit of $200 as profit. This is the maximum profit you can get.
If XYZ decline to $34, both options expire in-the-money. The September 35 call will have an intrinsic value of $200 and the September 45 call will have an intrinsic value of $700. This means that the position is now worth $500 at expiration or $500 loss. Since we had received a credit of $200 when entered the spread, our net loss comes to $300. This is the maximum loss you can have.
The above example did not take commission charges for easy understanding. But you must know the profit and loss also depends on the commision from your brokerage.
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