Thank you for visiting, please come again soon.
Link To:
Some Short Option Positions.
08/29 Contemplating a longer-range trade?- consider the following Dec. options as a test. On the assumption that the Yen will not climb above the last high (.8740) and that a drop is expected:
1. Sell one 8900 call @ .64 collecting a premium of (x12.5=) $800.00 (minus commission).
2. Buy one 8200 put @ .65 paying a premium of (x12.5=) $812.00 (plus commission).
Taken together the above is very bearish. In placing these positions you would be "short" an 8900 Dec. call and "long" an 8200 Dec. put.
Dec. 2002 JY |
CALLS |
PUTS |
| Date |
Close |
8400 |
8300 |
8200 |
8000 |
7900 |
7800 |
| 09/25 |
.8172 |
.72 |
1.0 |
1.37 |
.79 |
.53 |
.35 |
| 09/20 |
.8167 |
.69 |
.96 |
1.31 |
1.05 |
.73 |
.50 |
Dec. 2002 JY |
CALLS |
PUTS |
| Date |
Close |
9000 |
8900 |
8800 |
8300 |
8200 |
8100 |
| 09/25 |
.8172 |
.10 |
.13 |
.17 |
2.27 |
1.65 |
1.16 |
| 09/20 |
.8167 |
.12 |
.15 |
.19 |
2.63 |
1.99 |
1.47 |
| 09/19 |
.8265 |
.19 |
.24 |
.31 |
1.79 |
1.29 |
.91 |
| 09/13 |
.8254 |
.20 |
.25 |
.32 |
1.83 |
1.32 |
.93 |
| 09/11 |
.8348 |
.27 |
.34 |
.42 |
1.35 |
.95 |
.64 |
| 09/05 |
.8499 |
.48 |
.59 |
.76 |
.88 |
.60 |
.40 |
| 08/29 |
.8501 |
.51 |
.64 |
.82 |
.93 |
.65 |
.44 |
WARNING: Selling (granting) options carries a very high risk ("in the money" options may be exercised). The off-setting position would be an opposite futures position, in this case a long futures, however in order to avoid being exercised, far better to buy back the option when the market turns against it.
To liquidate this position you would:
1. Buy an 8900 call,
2. Sell an 8200 put.
Should there be any uncertainty concerning an expected decline one could consider the following:
A COVERED SHORT
1. Sell one contract at the market (filled @ .8501).
2. Sell one (8400 or 8300) put.
The sale of the put acts as a hedge against up-side risk to the amount of the premium received. In a market moving side-ways the gain would be in the time-erosion of the put.
To liquidate these positions you would:
1. Buy one contract (to clsoe the short position),
2. Buy back the put (to close the open option position).
A COVERED LONG
Use in a rising market-the reverse of a covered short.
The value of all options is subject to time decay that accelerates as expiry draws near. Further, as volatility decreases,the rate of decay increases. When dealing in options the expected return must be set against time (volatility) as well as market direction. Following are some option positions.
LONG CALL
The purchase of a call option involves the payment of a premium to hold the right but not the obligation to buy the underlying future at the strike price of the option any time before the expiry date of the option. The value of a call option increases as the futures price rises. A call is a very bullish instrument used in a strong up trending market.
Risk is limited to premium paid plus commission. When the futures price rises above the strike price the option is said to be "in the money". The deeper in the money an option is the greater the profit is realized. When the futures price is equal to the strike price the option is said to be "at the money". The holder of a call expects prices to rise and is said to be "long a call".
LONG PUT
Purchase of a put option involves the right to sell the underlying future at a given price any time before it expires. The value of a put increases as the futures price drops; a put is subject to the same forces relative to time and market movement as a call but in the opposite direction. A put is a very bearish instrument used in a strong down trending market. When the futures price is equal to the strike price of a put the option is said to be "at the money". When the futures price is below the strike price, the option is said to be "in the money". The holder of a put expects prices to drop and is said to be "long a Put".
SHORT CALL
Where there is a buyer there is also a seller. The writer or grantor of this option collects a premium in return for selling the right to buy the underlying contract at a given price (strike price). The holder of a call may exercise the option (generally when the option comes into the money). The writer is obligated to sell on demand. A grantor's risk is open-ended. Profit is limited to premium received. Profit is realized 1) as volatility declines 2) as the market falls 3) as time value rate of decay increases. Where the purchaser of a call is "long a call" the writer (or seller) of a call is said to be "short a call".
SHORT PUT
The writer or grantor of this option collects a premium in return for giving the purchaser the right to sell the underlying contract at a given price (strike price) i.e. to exercise the option (generally when the option comes into the money) The writer is obligated to buy on demand. A grantor's risk is open-ended. Profit is limited to premium received. Profit is realized 1) as volatility declines 2) as the market rises 3) as time value rate of decay increases. Where the purchaser of a put is " long a put" the writer (or seller) of a put is said to be "short a put".
COVERED LONG
Used in a stable or rising market this position involves the sale of a call option against a long futures contract. The sale of the call acts as a hedge against downside risk to the extent of premium received. Profit is realized in a stable market in the time decay of the call and/or in the futures position as the market rises.
COVERED SHORT
Used in a stable or falling market this position involves the sale of a put option against a short futures contract. The sale of the put acts as a hedge against upside risk to the extent of premium received. Profit is realized in a stable market in the time decay of the put and/or in the futures position as the market drops.
BULL CALL SPREAD
A Variation Of The Theme: involves two options with the same expiry date, the the purchase of one at a chosen strike (long) and the sale of another (short) at a higher strike. Profit in a rising market being the difference in value between the two with risk limited to the difference in premium received and premiun paid.
BULL PUT SPREAD
A Variation Of The Theme: involves two options with the same expiry date, the sale of one at a chosen strike (short) and the purchase of another at a lower strike (long). Profit in a dropping market being the difference in value between the two with risk limited to the difference in premium received and premiun paid.
LONG STRANGLE
This position is used in order to take advantage of a sudden move in price when market direction is not certain and consists of buying both calls (usually above the current futures price) and puts (usually below the current futures price) both options having the same expiry date.
SHORT STRANGLE
This position is used when the market is expected to remain inactive (low or declining volatility) and direction is sideways. Position consists of selling both calls (usually above the current futures price) and puts (usually below the current futures price) both options having the same expiry date.
LONG STRADDLE
When market direction is not predictable by buying calls and puts with the same strike price and expiry date this position is designed to take advantage of a sudden move in either direction.
SHORT STRADDLE
This position involves selling both calls and puts with the same strike price and expiry date, the purpose being to gain the premium when volatility declines.
back to top
LONG CALL: Bullish...buy calls...use in a strong up trending market.
LONG PUT Bearish...buy puts..use in a strong down trending market.
SHORT CALL: Neutral to bearish...sell out of the money calls...use in a neutral or down trending market
SHORT PUT: Neutral to bullish...sell out of the money puts...use in a neutral or up trending market
COVERED LONG: Neutral to bullish...sell calls buy futures...use in a stable or rising market.
COVERED SHORT: Neutral to bearish...sell puts sell futures...use in a stable or decling market.
BULL CALL SPREAD: Bullish...buy calls same time sell calls at higher strike...use in a rising market with reduced premium and limited profit potential.
BULL PUT SPREAD: Bearish...buy puts same time sell puts at lower strike price...use in a decling market with reduced premium and limited profit potential.
LONG STRANGLE: Cover top and bottom when direction is uncertain, buy calls above futures price and puts below futures price...to take advantage should there be a sudden move.
SHORT STRANGLE: Sell calls above futures price and puts below futures price...use in a stable market when volatility is down and prices are expected to keep within a narrow channel.
LONG STRADDLE: Buy calls and puts with same strike price and expiry date...establish to take advantage of a sudden move in either direction.
SHORT STRADDLE: Sell calls and puts with same strike price and expiry date...establish to benefit from premium when volitility is low.
| Option Position |
Bias |
Profit |
Loss |
Decay |
| Long Call |
Bull |
Open |
Limited |
Hurts |
| Long Put |
Bear |
Open |
Limited |
Hurts |
| Short Call |
Bear |
Limited |
Open |
Helps |
| Short Put |
Bull |
Limited |
Open |
Helps |
| Covered Long |
Neutral-bull |
Open |
Limited |
Helps |
| Covered Short |
Neutral-bear |
Open |
Limited |
Helps |
| Bull Call Spread |
Bull |
Limited |
Limited |
Hurts |
| Bull Put Spread |
Bear |
Limited |
Limited |
Hurts |
| Long Strangle |
Mixed |
Open |
Limited |
Hurts |
| Short Strangle |
Mixed |
Limited |
Open |
Helps |
| Long Straddle |
Mixed |
Open |
Limited |
Hurts |
| Short Straddle |
Mixed |
Limited |
Open |
Helps |
back to top