Buy put option
1、? Brief introduction of strategy
If investors are bearish on the underlying securities and think that the price of the underlying securities will fall, they can buy put options to gain income from the decline in the price of the underlying securities.
2. Income statement
Maximum loss: royalties
Maximum profit: exercise price-royalties
(Theoretically, when the price of the underlying security is 0 on the maturity date, the return is the largest.)
Break-even point: exercise price-royalties
3. Gain and loss of buying put options
4. Advantages and disadvantages of this strategy.
superiority
Can profit from the decline in the price of the underlying securities;
It has greater leverage effect than short selling;
The risk of buying put options is limited. When the price trend of the underlying securities changes adversely, we can avoid the huge losses that may be caused by directly shorting the underlying securities by giving up the exercise loss premium.
Although the potential benefits of buying put options are limited, the potential benefits will increase with the decline in the price of the underlying securities.
Disadvantaged
If the price of the underlying security changes in an unfavorable direction, it may lose all royalties.
5, warm tips
0 1 time loss
Time loss is unfavorable to the operation of buying put options. Time is the enemy of the buyer, so you should leave yourself a lot of time to deal with the transaction. In the last month of the expiration date, the option value will suffer a significant time loss.
02 market liquidity risk
Choose options with sufficient liquidity. The adequacy of liquidity depends on the number of open contracts. Generally speaking, the greater the amount of open contracts, the higher the liquidity.
03 Price fluctuation risk
Option is a complex financial derivative. Affected by several factors, sometimes the price fluctuates greatly, and both buyers and sellers of options may face losses. Before buying a put option, it is best to set a stop-loss price in advance, and when the price of the underlying securities reaches the stop-loss price, it is necessary to close the position in time.
04 operational risk
Refers to the risk caused by human error or computer system failure when investors trade options.
05 exercise settlement risk
If the option holder fails to prepare enough funds or securities after exercising, it will be judged as a failure of exercising and unable to exercise the rights granted by option contracts. Therefore, investors need to prepare securities in advance for the contracts they intend to execute. If the obligor of the option fails to prepare enough funds or securities for settlement performance on the settlement date, it will be judged as a breach of contract and may face penalties such as fines.
Sell put option
1, strategy introduction
If investors don't bearish on the price of the underlying securities and think that the price of the underlying securities will not be lower than the exercise price on the maturity date, they can sell the put option of the underlying securities and get the commission income.
Another function of selling put options is that when investors are willing to buy the underlying securities and feel that the current price is too high, they can sell imaginary put options (the price of the underlying securities > the exercise price of the put options). When the price of the underlying securities on the maturity date is lower than the exercise price and the put option buyer exercises, the seller can obtain the underlying securities at a lower cost price. On the other hand, when the price of the underlying securities does not fall on the maturity date, the put option buyer gives up and the seller gets all the royalties.
2. Income statement
Maximum profit: royalties
Maximum loss: exercise price-royalty (theoretically, the maximum loss occurs when the price of the underlying securities is 0 on the maturity date).
Break-even point: exercise price-royalties
3. Profit and loss of selling put options
4. Advantages and disadvantages of this strategy.
Advantages:
When the price trend of the underlying securities is judged correctly, when the price of the underlying securities rises or fluctuates within a certain range, as long as it is not lower than the break-even point, there is a chance to obtain certain income.
For investors who are willing to buy the underlying securities themselves, when the price of the underlying securities falls and the put option buyer exercises his rights, the put option seller can obtain the underlying securities at the exercise price, and the obtained royalties need not be refunded. Therefore, selling put options can be used as an alternative way to buy the underlying securities at a price lower than the current market price. On the other hand, if the price of the underlying securities does not fall, the buyer gives up the exercise and the seller gets all the royalties, which is an investment idea of skillfully using put options.
Disadvantages: When the price of the underlying securities falls, the buyer exercises the right and the seller must buy the underlying securities with falling prices. If the price of the underlying securities continues to run in an unfavorable direction, then higher leverage will bring greater losses. Investors need to pay close attention to risks and stop losses in time.
5, warm tips
Time loss: Time loss is beneficial to short selling options. As a counterparty to buy a put option, the biggest time loss usually occurs in the last month of the expiration date of the option, so as to make full use of the time depreciation of the option and strive for commission income. On the contrary, the longer the term of put option, the greater the uncertainty the seller faces.
Market liquidity risk: choose options with sufficient liquidity. The adequacy of liquidity depends on the number of open contracts. Generally speaking, the greater the amount of open contracts, the higher the liquidity.
Risk of price fluctuation: Option is a complex financial derivative. Affected by several factors, sometimes the price fluctuates greatly, and both buyers and sellers of options may face losses. Before selling put options, it is best to set a stop-loss price in advance, and when the price of the underlying securities reaches the stop-loss price, it is necessary to close the position in time.
Operational risk: the risk caused by human error or computer system failure when investors trade options.
Risk of exercise delivery: If the option holder fails to prepare enough funds or securities after putting forward the exercise, it will be judged as exercise failure and unable to exercise the rights granted by option contracts. Therefore, investors need to prepare securities in advance for the contracts they intend to execute. If the obligor of the option fails to prepare enough funds or securities for settlement performance on the settlement date, it will be judged as a breach of contract and may face penalties such as fines.