38 lines
1.2 KiB
Plaintext
38 lines
1.2 KiB
Plaintext
Option Fundamentals • 23
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Here an investor is bullish on the prospects of the stock, so he or she doesn’t
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mind accepting exposure to the stock’s downside risk below $50. In return for
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accepting this risk, the option investor receives a premium—let’s say $5. This
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$5 is income to the investor—kind of like a do-it-yourself dividend payment.
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By the way, as you will discover later in this book, this is also the risk-
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return profile of a covered call.
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Buying a Put for Protection
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50
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100
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150
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200
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-
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GREEN
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REDGRAY
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Above an investor wants to enjoy exposure to the stock’s upside potential
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while limiting his or her losses in case of a market fall. By buying a put
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option struck a few dollars under the market price of the stock, the investor
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cancels out the downside exposure he or she accepted when buying the
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stock. With this protective put overlay in place, any loss on the stock will be
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compensated for through a gain on the put contract. The investor can use
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these gains to buy more of the stock at a lower price or to buy another put
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contract as protection when the first contract expires.
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Tailoring Exposure with Puts and Calls
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-
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20
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40
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60
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80
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100
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120
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140
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160
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180
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200
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BE = $60.50
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GREEN
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RED |