25 lines
1.7 KiB
Plaintext
25 lines
1.7 KiB
Plaintext
CH.APTER 19
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The Sale of a Put
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The buyer of a put stands to profit if the underlying stock drops in price. As might
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then be expected, the seller of a put will make money if the underlying stock increas
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es in price. The uncovered sale of a put is a more common strategy than the covered
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sale of a put, and is therefore described first. It is a bullishly-oriented strategy.
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THE UNCOVERED PUT SALE
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Since the buyer of a put has a right to sell stock at the striking price, the writer of a
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put is obligating himself to buy that stock at the striking price. For assuming this obli
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gation, he receives the put option premium. If the underlying stock advances and the
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put expires worthless, the put writer will not be assigned and he could make a maxi
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mum profit equal to the premium received. He has large downside risk, since the
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stock could fall substantially, thereby increasing the value of the written put and caus
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ing large losses to occur. An example will aid in explaining these general statements
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about risk and reward.
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Example: XYZ is at 50 and a 6-month put is selling for 4 points. The naked put writer
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has a fixed potential profit to the upside - $400 in this example and a large poten
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tial loss to the downside (Table 19-1 and Figure 19-1). This downside loss is limited
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only by the fact that a stock cannot go below zero.
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The collateral requirement for writing naked puts is the same as that for writ
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ing naked calls. The requirement is equal to 20% of the current stock price plus the
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put premium minus any out-of-the-money amount.
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Example: If XYZ is at 50, the collateral requirement for writing a 4-point put with a
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striking price of 50 would be $1,000 (20% of 5,000) plus $400 for the put premium
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