33 lines
2.1 KiB
Plaintext
33 lines
2.1 KiB
Plaintext
O.,,er 16: Put Option Buying 263
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3, Sell the in-the-money long put and use part of the proceeds to purchase out-of
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the-money puts.
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4. Create a spread by selling an out-of-the-money put against the one he currently
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holds.
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These are the same four tactics that were discussed earlier with respect to call buy
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ing. In the fifth tactic, the holder of a listed put who has an unrealized profit might
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consider buying a listed call to protect his position.
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Example: A speculator originally purchased an XYZ October 50 put for 2 points when
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the stock was 52. If the stock has now fallen to 45, the put might be worth 6 points,
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representing an unrealized gain of 4 points and placing the put buyer in a position to
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implement one of these five tactics. After some time has passed, with the stock at 45,
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an at-the-money October 45 put might be selling for 2 points. Table 16-3 summarizes
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the situation. If the trader merely liquidates his position by selling out the October 50
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put, he would realize a profit of 4 points. Since he is terminating the position, he can
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make neither more nor less than 4 points. This is the most conservative of the tactics,
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allowing no additional room for appreciation, but also eliminating any chance of los
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ing the accumulated profits.
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TABLE 16-3.
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Background table for profit alternatives.
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Original Trade Current Prices
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XYZ common: 52 XYZ common: 45
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Bought XYZ October 50 put at 2 XYZ October 50 put: 6
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XYZ October 45 put: 2
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If the trader does nothing, merely continuing to hold the October 50 put, he is
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taking an aggressive action. If the stock should reverse and rise back above 50 by
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expiration, he would lose everything. However, if the stock continues to fall, he could
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build up substantially larger profits. This is the only tactic that could eventually result
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in a loss at expiration.
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These two simple strategies - liquidating or doing nothing are the easiest
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alternatives. The remaining strategies allow one to attempt to achieve a balance
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between retaining built-up profits and generating even more profits. The third tactic
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that the speculator could use would be to sell the put that he is currently holding and |