# Options Strategies

## Strategy Number 7 – Long "Covered" Put

 Market dATA DJ Index 100 points Prices Base asset price \$10,000 Put 100 \$1,000
Strategy name:

Long "Covered" Put

Recommended use of strategy

Expectation of an increase in DJ Index, but with concern that the index could fall.

Strategy components

1. Purchasing (Long) the base asset – the DJ Index or a mutual fund investing in the DJ shares (see page 9).
2. Purchasing a Long Put option at a strike price equal to the DJ Index.

Example: Purchase (Long) the base asset at a price of \$10,000 and purchase a Long Put 100 option for \$1,000. The strategy is known as a Short Futures Contract since this combination creates an obligation (contract) to sell the DJ Index at the exercise date at its current price (100 points - \$10,000).

Expenses / Income from building the strategy

Expenditure of \$11,000.

Strategy graph:

Auxiliary table for building the profit line

 DJ Index(Horizontal axis) (Fixed expenses)/ fixed income Variable expenses(Put contribution) Base Asset contribution Total profit / (loss) (Vertical axis)2+3+4 1 2 3 4 5 60 \$11,000 \$4,000 \$6,000 (\$1,000) 70 \$11,000 \$3,000 \$7,000 (\$1,000) 80 \$11,000 \$2,000 \$8,000 (\$1,000) 90 \$11,000 \$1,000 \$9,000 (\$1,000) 100 \$11,000 --- \$10,000 (\$1,000) 110 \$11,000 --- \$11,000 \$0 120 \$11,000 --- \$12,000 \$1,000 130 \$11,000 --- \$13,000 \$2,000 140 \$11,000 --- \$14,000 \$3,000 150 \$11,000 --- \$15,000 \$4,000

Strategy analysis:

Source of profit

The profit arises from the investment in the mutual fund. The profit increases as the index goes up.

Source of loss

Cost of building the strategy - \$11,000. However when the DJ Index goes down, we lose on the mutual fund investment but are fully compensated by the Put option.

Break-even point

This occurs at index 110.

Comment

This strategy is a form of purchasing "insurance" against the risk of a fall in the value of the DJ Index shares basket.

Strategy Number 7 – Long "Covered" Put552