11/29/2013

Put Friendly Trading

      Ever since the stock market crash in 1987 investors have viewed put options as a short hedge against overpriced and turbulent markets. The reality is there are better ways to utilize put options rather than outright costly hedging. Two of the most proficient ways to look at puts are collars in an up market or when a stock that you own makes a parabolic up move and in a down market via the outright sale or via creating a synthetic long call.

      In the first example using puts as part of a collar the owner of the shares can approach the trade as almost a free protection against a sudden reversal and simultaneously capping the stock to the upside via the sale of an OTM call.

XYZ stock trades at $85.80

Earnings are due in the next week and analysts are divided on the forward outlook of the company’s guidance.

The June 90 calls are trading for .30 and the June 80 puts are trading for .23

Selling the call and buying the put can be done for a .07 credit. The credit pays for the commissions and creates a free collar on the stock which is now capped out at 90.07 and creates a downside floor at 80.07 before commissions are taken into consideration.

The July 90 calls are trading for .92 and the July 80 puts are trading for .82

Selling the call and buying the put can be done for a .10 credit. The credit pays for the commissions and creates a free collar on the stock which is now capped out at 90.10 and creates a downside floor at 80.10 before commissions are taken into consideration.

The Aug 90 calls are trading for 1.60 and the Aug 80 puts are trading for .1.55

Selling the call and buying the put can be done for a .07 credit. The credit pays for the commissions and creates a free collar on the stock which is now capped out at 90.05 and creates a downside floor at 80.05 before commissions are taken into consideration.

In each of the above scenarios the trader has protected his downside via the purchase of the put for approximately 6.6% drop in the shares and has capped the stock via the simultaneous sale of the call for an upside move of approximately 5% 

You can view the entire article published on tradersexclusive.com

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*Disclaimer: This is not a recommendation. All trading entails risk. Anyone employing any strategies and having limited knowledge of options trading should consult with a FNRA licensed professional.