March 2012
Beginner to intermediate
237 pages
6h 55m
English
CHAPTER 10
Cash-Secured Puts
Novice traders tend to remember the basic option concepts by thinking of calls as the option to use when you're bullish on the market and puts as the option to use when you're bearish. In the simplest trade setup—buying a call or put as a directional strategy—that's not a bad way to become familiar with option trading. However, that approach oversimplifies the various choices you have as an option trader in constructing your trade for bull, bear, or sideways markets.
The put option may also be used when you're bullish on a stock or exchange-traded fund (ETF). The difference is that instead of buying the right to sell the stock (long put), you're selling that right to someone else. In doing so, you obligate yourself to purchase the stock because you must take the opposite side of the trade you sold. Remember, every buy matches with a sell and every right matches with an obligation. So if the person who buys a put has a right to sell stock, then selling a put places you into an obligation to buy stock. When would you want to buy stock? When you're at least somewhat bullish on the stock, of course. Cash-secured puts may be used to position yourself for buying stock that you would be willing to own based on your technical and fundamental analysis.
GETTING TO KNOW THE STRATEGY
Interestingly, we've observed that investors like to assign a fair value to a favorite stock when it comes time to buy that stock. This price is usually not established by any fundamental ...
