Description
The purchase
of a Put, while
owning shares in
XYZ, is a strategy
with a limited loss
and (after subtracting
the Put premium)
unlimited profit.
When to use
When stock ownership
is desired yet investor
is concerned about
near-term downside
risk.
Risk/Reward
Characteristics
Profit potential
is unlimited. Losses
limited as long
as the Put option
is owned.
Break-even
Point: Purchase
price of XYZ stock
+ premium paid for
Put.
Time Decay:
Negative. Over time,
the time value portion
of the Put erodes
(i.e., decays).
At expiration, the
Put's value will
equal its intrinsic
value.
Volatility:
Changes in the Put
option's implied
volatility has an
effect on the "time
value" portion of
the option's premium.
If volatility increases,
options increase
in price. If volatility
decreases, options
decrease in price.
Thus, a change in
the Put option's
implied volatility
has the same effect
as changing the
number of days remaining
until the option's
expiration: an increase
in volatility is
like adding more
days to the life
of an option.
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