Judgment basis: neutral or bullish attitude towards the target stock.
Profit and loss situation:
- Maximum profit: Limited, option premium + difference between exercise price and stock purchase price
- Maximum loss: The extent of the loss corresponds to the extent of the stock price decline
- Break-even point: stock purchase price – option premium received
Volatility: An increase in volatility is negative, a decrease is positive
Time reduction: positive impact
4. Selling Put Options (Short Put)
Selling a put option (Short Put) means that the investor sells a contract that gives the buyer the right and the seller the obligation to buy the underlying asset at a specific price at a specific time in the future. The seller receives the premium and assumes the obligation to buy the underlying asset at the agreed price at a specific time in the future.
Let’s take an example to explain the principle of selling a put option. Assume that the current market price of a company’s stock is $100. An investor expects the stock price to remain stable or increase. He can choose to sell a put option, that is, sell a put option.
The investor sells a put option with an exercise price of $90 and receives a premium of $2. If the stock price is above $90 when the option expires, the buyer will not exercise the option and the seller can keep the $2 premium received. However, if the stock price is below $90 when the option expires, the buyer will exercise the option and the seller will need to buy the stock at $90, even if the market price is below $90 at the time.
In this case, the seller will face a loss. For example, if the stock price drops to $80 when the option expires, the seller will need to buy the stock at $90 and then sell it in the market at $80, resulting in a loss of $10.
In summary, selling put options is an investment strategy that allows investors to gain from stock prices remaining stable or rising, but may carry the risk of being limited and may need to buy the stock at a higher price if the stock price falls, resulting in a loss.
Is trading options risky?
Any investment has certain risks, the difference is the type of risk and the severity of the risk. As far as option trading is concerned, the risks that may exist in the trading process are:
1. Price Fluctuation Risk
Options trading, like futures trading, is a leveraged financial derivative product. There are many factors that affect option prices, such as the price and time of the futures underlying, which can lead to large price fluctuations. This is one of the important risks that investors need to pay attention to.
