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If you were to exercise your put option after earnings, you invoke your right to sell 100 shares of XYZ stock at $40 each. The written put option is covered if the put option writer is also short the obligated quantity of the underlying security. The short put is naked if the put option writer did not short the obligated quantity of the underlying security when the put option is sold.
For the patient investor who is bullish on a particular company for the long haul, writing naked puts can also be a great strategy to acquire stocks at a discount. The put option writer is paid a premium for taking on the risk associated with the obligation. When the options trader is bearish on particular security, he can purchase put options to profit from a slide in asset price.

A put option contract with a strike price of $40 expiring in a month's time is being priced at $2. With this crash in the underlying stock price, your put buying strategy will result in a profit of $800.
See our long put strategy article for a more detailed explanation as well as formulae for calculating maximum profit, maximum loss and breakeven points. Put option writers, also known as sellers, sell put options with the hope that they expire worthless so that they can pocket the premiums.
The covered put writing strategy is employed when the investor is bearish on the underlying. Put spreads limit the option trader's maximum loss at the expense of capping his potential profit at the same time.

The price of the asset must move significantly below the strike price of the put options before the option expiration date for this strategy to be profitable. Since each put option contract covers 100 shares, the total amount you will receive from the exercise is $1000. As you had paid $200 to purchase this put option, your net profit for the entire trade is $800.

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Author: admin | 21.08.2014 | Category: Options Trading Account

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