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training_data/curated/text/4424049d1e02f922fc679aacefdd18c8d1b313665107edce273330958edeecec.txt

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+to be more risk than usual of future volatility. The question remains: Is the
+higher premium worth the risk?
+The answer to this question is subjective. Part of the answer is based on
+Stacie’s assessment of future volatility. Is the market right? The other part is
+based on Stacie’s risk tolerance. Is she willing to endure the greater price
+swings associated with the potentially higher volatility? This can mean
+getting whipsawed, which is exiting a position after reaching a stop-loss
+point only to see the market reverse itself. The would-be profitable trade is
+closed for a loss. Higher volatility can also mean a higher likelihood of
+getting assigned and acquiring an unwanted long stock position.
+Cash-Secured Puts
+There are some situations where higher implied volatility may be a
+beneficial trade-off. What if Stacie’s motivation for shorting puts was
+different? What if she would like to own the stock, just not at the current
+market price? Stacie can sell ten 65 puts at 1.75 and deposit $63,250 in her
+trading account to secure the purchase of 1,000 shares of Johnson &
+Johnson if she gets assigned. The $63,250 is the $65 per share she will pay
+for the stock if she gets assigned, minus the 1.75 premium she received for
+the put × $100 × 10 contracts. Because the cash required to potentially
+purchase the stock is secured by cash sitting ready in the account, this is
+called a cash-secured put.
+Her effective purchase price if assigned is $63.25—the same as her
+breakeven at expiration. The idea with this trade is that if Johnson &
+Johnson is anywhere under $65 per share at expiration, she will buy the
+stock effectively at $63.25. If assigned, the time premium of the put allows
+her to buy the stock at a discount compared with where it is priced when the
+trade is established, $64. The higher the time premium—or the higher the
+implied volatility—the bigger the discount.
+This discount, however, is contingent on the stock not moving too much.
+If it is above $65 at expiration she won’t get assigned and therefore can
+only profit a maximum of 1.75 per contract. If the stock is below $63.25 at
+expiration, the time premium no longer represents a discount, in fact, the
+trade becomes a loser. In a way, Stacie is still selling volatility.