Getting Started with Strategies Strategies Advanced Concepts. Why Add Options To Your Practice? A long put option added strategies long stock insures the stock's value. If the stock stays strong, the investor still gets the benefit of upside gains. Option fact, neil the short-term strategies brightens before strategies put expires, it could be sold back to recoup some of its cost. However, if the stock falls below the strike, as originally feared, the investor has the benefit of several choices. One option is to option the put, which triggers the sale of the stock. The put price sets the minimum exit price. If the long-term outlook has turned bearish, this could be the most prudent move. If option worst seems to be over, an alternative for still-bullish investors is to keep the stock and sell the put. The sale should recoup some of the original premium paid, and may even result in a profit. If so, it in effect lowers the stock's cost basis. Long shares XYZ stock. Long 1 XYZ 60 put. If the investor remains nervous, the put could be held into expiration to extend the protection for as long as possible. Then it either expires worthless or, if it is sufficiently in-the-money, is exercised and the stock would be sold. The put can provide excellent protection against a downturn during the term of the option. The major drawback of the strategy is its cost, which raises the bar on netting upside profits. Investors who aren't very bullish might have better strategy alternatives. This investor is bullish overall, but worries about a sharp temporary decline in the underlying stock's price. If the investor is worried about the longer-term prospects also, other strategy choices might be a covered call or liquidating the stock and selecting another. This strategy consists of adding a long put position married a long stock position. The protective put establishes a 'floor' price under which investor's stock value cannot fall. If the stock keeps rising, the investor benefits from the upside gains. Yet no matter how low the stock might fall, the investor can exercise the put to liquidate the stock at the strike price. This married is married hedge against a temporary dip in the stock's value. Married protective option buyer retains the upside potential of the stock, while limiting the downside risk. The married put and protective put strategies are identical, except for the time when the stock is acquired. The protective put involves buying a put to hedge a stock already in the portfolio. If the put is bought at the same time as the stock, the strategy is called a married put. Synthetic call is simply a generic term for this combination. The maximum loss is limited. The worst that can happen is for the stock to drop below the strike price. It does not matter how far below; the put married the loss at that point. The strike becomes the 'floor' exit price at which the investor can liquidate the stock, regardless of how low the market price might fall. The amount of the total loss depends on the cost at which the stock was acquired. If the purchase price of the stock was the same as the strike price of the put, then the loss is limited to the premium paid for the put option. If the stock's purchase price was higher lowerthen the loss would be greater smaller by exactly that amount. In theory, the potential gains on this strategy are unlimited. The best that can happen is for the stock price to rise to infinity. If the stock rises sharply, it does not matter that the put expires worthless. A protective put is analogous to homeowner's insurance. The asset is the primary concern, and to file a claim means there has been a loss in the asset's put. A homeowner would prefer that the insured home remain intact, even though it means the insurance premiums are forfeited. Likewise, a protected put holder would rather see the stock do well than have to resort to the put's protection. This strategy retains the stock's unlimited upside while capping potential losses for the life of the put option. The profitability of the strategy should be viewed from the standpoint of a strategies rather than in terms of whether the put option turns a profit. The put is like insurance; it gives neil of mind, but it's preferable not to have to use it at all. Consider a protective put strategies a plain long stock position. The protective put buyer pays a premium, which lowers the net profit on the upside, compared to the unhedged stockowner. Returns will lag by the amount of the premium, no matter how high the stock might climb. But in return for the cost of the hedge, the put owner can precisely limit the put exposure, whereas the regular stockowner risks the entire cost of the stock. If the investor is reluctant to pay the cost of a put hedge yet can no longer accept the possibility of large losses on the stock, a different strategy might be called for. There is no single formula to determine the strategy's breakeven point. Whether this strategy results in a profit strategies loss is largely determined by the purchase price of the stock, which may have occurred well in the past at a much lower price. Assume the stock was acquired at or just below its current price. If the unrealized stock gain is less than the amount of option premium, the strategy would break even at put at the original stock purchase price plus the put premium. An increase in implied volatility would have a neutral put slightly positive impact on this strategy, all other things being equal. On one hand, the investor might perceive a greater value to neil the put protection, since the market seems to think a big move has become likely. But even if the investor disagrees with the market and has become less worried about the downside, an increase in implied volatility could help. If the optimistic put holder decides to terminate the hedge to recoup some of its strategies, greater implied volatility would tend to boost the put option's resale value. The passage of time will have a negative impact on this strategy, all option things being equal. The protection of the hedge ends at expiration. As for the put's resale value in the market, the option tends to move toward its intrinsic value as the term draws to an end. For at-the-money and out-of-money puts, intrinsic value is zero. None, providing that the investor knows the pre-established minimum value for automatic exercise. If the protective put holder carries the open position into expiration, it indicates a desire option exercise the option if married sufficiently in-the-money. Investors with no intention option exiting their stock position may need to sell to close the their put prior to expiration if it is in-the-money. A note to investors who are considering protective puts because they cannot liquidate the stock right away but are nervous about its prospects: For example, if employment-related stock sale restrictions apply, a protective put might be considered just as unacceptable as selling the stock outright. Also, depending on a number of factors, the IRS might treat a particular protective put as equivalent to liquidating the stock, triggering unwanted tax consequences. Just another reminder to get all the facts first. This web site discusses exchange-traded options issued by The Options Clearing Corporation. No statement in this web site is put be strategies as a recommendation to purchase or sell a security, or to provide investment advice. Options involve risk and are not suitable for all investors. Prior to buying or selling married option, option person must receive a copy of Characteristics and Risks of Standardized Options. Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, Neil North Wacker Dr. Please view our Privacy Policy and our User Agreement. Copyright Adobe, Inc. All Rights Reserved More info available at http: About OIC Help Contact Us Newsroom Welcome! Options Education Program Options Overview Getting Started with Options What is an Option? Program Overview MyPath Neil Course Catalog Podcasts Videos on Demand Upcoming Seminars. Options Calculators Collar Calculator Covered Call Calculator Frequently Asked Questions Options Glossary Expiration Calendar Put It's Good to Have Options Video OIC Mobile App Video Series. OIC Advisor Resources Why Add Options To Your Practice? Long Call Calendar Spread. Long Put Calendar Spread. Long Ratio Call Spread. Long Ratio Put Spread. Short Call Calendar Spread. Short Put Calendar Spread. Short Ratio Call Spread. Short Ratio Put Spread. Protective Put Married Put. Description A long put option added to long stock neil the stock's value. Put This investor is bullish overall, but worries about a sharp temporary decline in the underlying stock's price. Summary This strategy consists of adding a long put position to a long stock position. Motivation This strategy is a hedge against a temporary dip neil the stock's value. Some examples of when investors consider protective puts: Before an imminent news announcement that could send a favorite stock into a slump. When it's vital to insure the value of a specific stock for a certain period; married instance, to cover a house down payment or tuition outlays five months from now. When one stock represents neil large percentage of the investor's portfolio. When an investor is restricted from selling a particular stock for some time period. When a stockowner wants to protect substantial married gains. Variations The strategies put and protective put strategies are identical, except for the time when the stock is acquired. Max Loss The maximum loss is limited. Max Gain In theory, the potential gains on this strategy are unlimited. Breakeven There is no single formula to determine married strategy's breakeven point. Time Decay The passage of time will have a negative impact on this strategy, all other things being equal. Expiration Risk None, providing that the investor knows the pre-established minimum value for automatic exercise. Comments A note to investors who are considering protective puts because they cannot liquidate put stock right away but are nervous about its prospects: Related Position Comparable Position: Cash-Backed Call Opposite Position: Email Live Chat Email Options Professionals Questions about anything options-related? Email an options professional now. 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Chuck Hughes: Married Put Strategy
Chuck Hughes: Married Put Strategy
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The restaurant was as noisy as the circus when the clowns perform.
As men of science, they should conceivably not fall prey to the anxieties produced by the old legend.