Straight Puts refers to the purchasing or selling of put options to open a position. This strategy is also commonly referred to as Long or Short Puts. Generally, these two strategies are speculative in nature.
A strategy consisting of the purchase of a Put option. This strategy is designed for a prediction that the underlying stock or index may decline.
For use when investor anticipates:
Financial Characteristics:
Objective:
*The maximum loss on a long put is limited as long as the investor does not exercise it which will result in a short stock position for their account. There is an additional risk associated with the expiration weekend. If the long put is exercised the investor ends up with a short position in the stock. Good news during the weekend could force even greater losses on the investor before he can exit the short equity position.
**The maximum profit or gain is realized if the stock prices goes to zero.
EXAMPLE (Long Put)
Currently, XYZ trades at $25/share. The investor employs the strategy of buying one in-the-money put (strike $30) for $6.00/share (1 contract= $600). Using this strategy, the investor pays a cash debit of $6.00. This is the maximum loss the investor can incur. If the stock increases to $31.00/share, the long put will expire worthless, and the investor loses the $6 premium. The maximum gain, if the stock price is lower than the strike, is the difference between the put strike and the closing price, less the premium debit spent in buying the put. If the stock is trading at $19, then 30-19-6 = $5 profit. The break even point for the strategy occurs when the price of XYZ is at $24.
The Short Put generally will allow an investor to profit from upward movements in the underlying security or index. It uses the exact opposite structure as the Long Put. If the security rises in value, the investor can generally profit. The maximum the investor can profit is the premium received by selling the option. If the security declines in value, the maximum the investor can lose is the strike price less the credit received for selling the put.
For use when investor anticipates:
Financial Characteristics:
Objective:
EXAMPLE (Short Straight Put)
Currently, XYZ trades at $25/share. The investor believes the stock will rise and wants to benefit from the upward movement. The investor shorts a Straight Put option (strike $30) for $6.00/share (1 contract= $100). The maximum loss is the difference between the strike of the option and the premium received through the sale of the put ($30-$6=$24). If the stock closes at $19 on expiration, there would be a $5 loss ($30-$19-$6=$5 loss). The maximum profit an investor can receive is the credit received when selling the option. For example, if the same XYZ 30 strike put option sold for $6, and the stock closed over $30, the option would expire worthless, and the investor could pocket the entire $6. The break even point for the strategy occurs when the price of XYZ is at $24.
Commissions, taxes, and transaction costs are not included in any of these strategy discussions, but can affect final outcome and should be considered. Please contact a tax advisor to discuss the tax implications of these strategies. Many of the strategies described herein require the use of a margin account. With long options, investors may lose 100% of funds invested. In-the-money long puts need to be closed out prior to expiration, since exercising them could create short stock positions.
Options carry a high level of risk and are not suitable for all investors. Certain requirements must be met to trade options through Schwab. Multiple leg options strategies will involve multiple commissions. Please read the options disclosure document titled "Characteristics and Risks of Standardized Options." Member SIPC
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