Now let's look at Put Options. Put options are the options to "put" (sell) options in the market at a given price. They become more valuable as the stock drops (If you have the right to sell something at X even though it's only worth St) and the value is (X - St). It has similar features to short selling (Short the Underlying Asset) but it's value is capped at X (limited upside potential).
If the market price goes above X, the put option is worthless (why use a put to sell an asset at a price lower than what you can get for it in the market?). So for any price above X, the value is zero. For each dollar below the strike price, the intrinsic value goes up a dollar.
The profit profile for a long put position is as follows:
Long Put Profit = (X - St) - Call Premium, while X > St- Call Premium, otherwise
Break Even point, St when Long Put Profit = 0
St = X - Call Premium
Note, whenever you are Long the option (regardless of what type of option), you pay the premium because you gain "flexibility" to exercise the option. If you are ever short an option you take the premium to assume the risk that the counter party will execute the option when it's "in-the-money".
Now the profile of a Short Put:
No comments:
Post a Comment