Options Strategies

Strategy Number 4 - Short Put Option


Market dATA
DJ Index 100 points
Prices
Put 100 $1,000

Strategy name:

Short Put option

Recommended use of strategy

Expectation of increase in DJ Index

Strategy components

Writing a Put option

Example: Short Put 100 at a price of $1,000

Expenses / Income from building the strategy (at start date)

Income of $1,000

Strategy graph:

table

  


Auxiliary table for building the profit line

 

DJ Index

(Horizontal axis)

(Fixed expense) / fixed income

Variable expenses (Put contribution)

Variable income

Total profit / (loss)

(Vertical axis)

2+3+4

Œ



Ž





50

$1,000

($5,000)

-

($4,000)

60

$1,000

($4,000)

-

($3,000)

70

$1,000

($3,000)

-

($2,000)

80

$1,000

($2,000)

-

($1,000)

90

$1,000

($1,000)

-

$0

100

$1,000

-

-

$1,000

110

$1,000

-

-

$1,000

120

$1,000

-

-

$1,000

130

$1,000

-

-

$1,000

140

$1,000

-

-

$1,000

 

Strategy analysis:

Source of loss

Loss arising from the Put option (when the DJ Index declines below the exercise index of 100 points). The loss increases as the index falls.

Source of profit

The profit arising from building the strategy - $1,000.

Break-even point

When the loss from the option reaches the income from writing the option ($1,000). This occurs at index 90.

Strategy Number 4 - Short Put Option5100Strategy Number 4 - Short Put Option