One of the new strategies I am going to be using in Cabot Options Trader Pro is what is called a Put-Write. This is a strategy that many traders use if they are willing to buy a stock, though at a lower level than it’s currently trading at.
So let’s take a look at some of the details of such a strategy:
A Put-Write strategy is used when a rise in the price of the underlying asset is expected, or a significant decline is not expected.
This strategy is often used by traders who are willing to enter a long stock position in a stock at a lower price than the stock is currently trading at.
This strategy is the sale of a put at a specific strike price with the potential for loss until the stock hits zero. The maximum profit on this trade is the amount of premium received.
If I were to sell a put, and the stock went below my put’s strike price, I would be assigned 100 shares per put I’ve sold, thus making me long 100 shares per put sold.
For example, if stock XYZ is trading at 110 and I’m willing to buy the stock at 100, I could sell the XYZ 100 strike put for $1.
If the stock were to close above 100 at expiration, I would collect a maximum profit of $1 per contract sold … or $100 per 1 contract.
If the stock were to close at 99 at expiration, I would break even and be long the stock.
If the stock were to go below 99, I would lose $100 per contract sold per point below 99.
As I said, this is a great strategy to collect yield in a stock that I would be willing to buy.
Take for instance Facebook (FB). With the stock trading at 70 today I might say to myself “I’m willing to buy FB for 65 a share.” Because of this, I could potentially sell the April 65 Puts for $1.75. If FB closed above 65 on the April expiration, I will simply collect my $175 per put sold.
However, if FB were to close at 64 on the April expiration, I would be assigned on my put, making me long 100 shares per put sold.