TweetPut options are basically the opposite of call options, when you purchase a call option somebody else has taken out a put option to cover the other side to your trade.
If, however, the share price never drops below the strike price (in this case, $50), then you would not exercise the option (because selling a stock to Trader B at $50 would cost you more than it would cost to buy it). Using put options to hedge your investment portfolio is the perfect strategy; most professional hedge fund manager’s this strategy to hedge open positions. Basically you short shares in an underlying asset and then sell put options against them in order to profit from a bearish move.
Profit for the covered put option strategy is limited and maximum gain is equal to the premiums received for the options sold.
Naked Puts – Naked puts, sometimes called uncovered puts are put options where the seller does not have a position in the underlying stock. If you’re new to options you need to be careful which broker you choose, options trading is very risky and can result in significant losses for the unwary. For this reason we recommend rookies start trading with either optionsXpress or OptionsHouse, since both brokers offer excellent support and training as well as intuitive platforms and reasonable commissions.
Successful options’ trading is difficult and will require a small amount of dedication on your part, don’t make the mistake of hampering your success by using a broker that doesn’t have a vested interest in you succeeding. Continuing further from our previous article Bear Put Spread: Example with Payoff Charts Explained, here is part II of the same. So, we were having the BLUE graph which was the net Payoff Function for the Bear Put Spread but without the price of Put options being taken into consideration.
And as explained in the last part, we considered the prices as follows: the ITM Long Put Option will cost you $5 and OTM short Put Option position will get you $2. So let’s take a look at a typical put option trade first, then we’ll look at ways to implement them into your trading strategy. The put option premium paid to trader B for buying the contract of 100 shares at $5 per share, excluding commissions = $500 (R).
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