Long Calls and Puts Profits are achieved if the stock is trading above the Break Even point. Profits are achieved if the stock is trading below the Break Even point. Profits are theoretically infinite.
This article will prepare investors to effectively use the long put and short put strategies to generate a profit. A put option is a contract between a buyer, who is known as the option holder, and a seller, who is known as the option writer.
This contract gives the holder the right, but not the obligation, to sell shares of an underlying security at a set price. The set price in an option contract is known as the strike price. Put option contracts have expiration dates.
The forecast must predict 1 that the stock price will fall so the put increases in price and 2 that the stock price decline will occur before option expiration.
Option contracts must be exercised before or on the expiration date, put option long the option will expire as worthless. If an investor were to execute the long put strategy, then he would buy a put option and assume the role of the option holder. If an investor were to execute the short put strategy, then he would sell a put option and assume the role of the option writer.
One option contract is equal to shares of the underlying stock. This amount is the maximum amount the holder can lose.
The investor expects the price of XYZ to increase within the next month. The option expires as worthless.
Note: While we have covered the use of this strategy with reference to stock options, the long put is equally applicable using ETF options, index options as well as options on futures. However, for active traders, commissions can eat up a sizable portion of their profits in the long run. If you trade options actively, it is wise to look for a low commissions broker.
The long put and short put strategies can be used put option long an investor expects the price of an underlying stock to either increase or decrease. After reading this article, investors should feel prepared to generate a profit from buying and selling put options.