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+264 Part Ill: Put Option Strategies 
+use some of the proceeds to purchase the October 45 put. The general idea in this 
+tactic is to pull one's initial investment out of the market and then to increase the 
+number of option contracts held by buying the out-of-the-money option. 
+Example: The trader would receive 6 points from the sale of the October 50 put. He 
+should take 2 points of this amount and put it back into his pocket, thus covering his 
+initial investment. Then he could buy 2 October 45 puts at 2 points each with the 
+remaining portion of the proceeds from the sale. He has no risk at expiration with this 
+strategy, since he has recovered his initial investment. Moreover, if the underlying 
+stock should continue to fall rapidly, he could profit handsomely because he has 
+increased the number of put contracts that he holds. 
+The fourth choice that the put holder has is to create a spread by selling the 
+October 45 put against the October 50 that he currently holds. This would create a 
+bear spread, technically. This type of spread is described in more detail later. For the 
+time being, it is sufficient to understand what happens to the trader's risks and 
+rewards by creating this spread. The sale of the October 45 put brings in 2 points, 
+which covers the initial 2-point purchase cost of the October 50 put. Thus, his "cost" 
+for this spread is nothing; he has no risk, except for commissions. If the underlying 
+stock should rise above 50 by expiration, all the puts would expire worthless. (A put 
+expires worthless when the underlying stock is above the striking price at expiration.) 
+This would represent the worst case; he would recover nothing from the spread. If 
+the stock should be below 45 at expiration, he would realize the maximum potential 
+of the spread, which is 5 points. That is, no matter how far XYZ is below 45 at expi­
+ration, the October 50 put will be worth 5 points more than the October 45 put, and 
+the spread could thus be liquidated for 5 points. His maximum profit potential in the 
+spread situation is 5 points. This tactic would be the best one if the underlying stock 
+stabilized near 45 until expiration. 
+To analyze the fifth strategy that the put holder could use, it is necessary to 
+introduce a call option into the picture. 
+Example: With XYZ at 45, there is an October 45 call selling for 3 points. The put 
+holder could buy this call in order to limit his risk and still retain the potential for 
+large future profits. If the trader buys the call, he will have the following position: 
+Long l October 50 put C b' d t 5 . t 
+l O b 5 all - om me cos : porn s Long cto er 4 c 
+The total combined cost of this put and call combination is 5 points - 2 points were 
+originally paid for the put, and now 3 points have been paid for the call. No matter 
+where the underlying stock is at expiration, this combination will be worth at least 5