Description
Not often used
by bearish investors.
Although mechanics
of execution are
not that complicated,
most investors only
think in terms of
making money from
a stock advancing,
not by one declining.
When to use
When bearish
on XYZ and willing
to accept the strategy's
risk/reward profile.
Offers the greatest
potential if opinion
is correct. If wrong,
has the highest
potential risk.
Risk/Reward
Characteristics
Profit increases
as XYZ declines.
Loss increases as
XYZ rallies. The
strategy's P&L is
based solely on
the difference between
the initial selling
price and the eventual
purchase price.
Break-even
Point: Initial
shorting price.
Time Decay:
No effect.
Volatility:
The more volatile
the underlying stock
becomes, the greater
the potential for
both larger profits
and larger losses.
Assignment
Risk: The investor
must watch XYZ for
possible assignment
if XYZ declines
below the Put's
strike.
Note:
Short-selling requires
that the investor
have a complete
understanding of
both how shares
are borrowed and
lent and the responsibilities
and rights of both
parties to the agreement.
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