Index Put Writing: Taking the Edge off Equity Risk

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In modern markets volatility is becoming the norm rather than the exception. Going to cash may be unattractive in a low interest rate environment with inflation eroding your nest egg. Similar to buying insurance for your car and house, you can use a buying puts strategy or put protection investment strategy to protect your stock portfolio.

Buying a put option index put options strategy a strategy used to protect a portfolio against adverse market movements. Through the use of stock and index put options, investors concerned about declining markets can protect their portfolio without the need to liquidate their holdings. This has three advantages.

Each put contract generally covers units of the underlying stock and each index option covers 10 times the value of the index put options strategy.

For many, a stock portfolio is their biggest asset and assurance for retirement. If you insure your car, house and income, why wouldn't you also protect your stock portfolio? This buying puts strategy of using buying protection for your stock portfolio could be one of the smartest things you do for your future retirement.

However, there is a downside to buying protection. As volatility rises in more uncertain markets, protection will get exponentially more expensive as sellers demand more premium to take on the risk. However, with strategy advice from a PhillipCapital adviser, we can help you pick the opportune moment to buy put option for protection or even go short and position for a fall in the market.

Let's say for example you own 1, shares in stock XYZ. You can also sell this ahead of time before expiry if index put options strategy feel the market will move back up. Alternatively you can protect a portfolio with index puts. Each index put covers 10 times the value of the index price and is a quick and effective way to hedge a large portfolio. The only risk you have is if the insurance contract expires worthless. In fact, this is the preferred situation as you would want your stocks to rise and for your capital gains to exceed the cost of the contract in the long term.

If you want to take advantage of this investment strategy for hedging and protect your investments, contact one of our friendly, experienced and fully accredited options advisors.

Professional, fully index put options strategy and friendly advisors can help tailor the perfect solution to your needs. Established in Singapore index put options strategyIndex put options strategy operates across 16 countries, has over 1 million clients and manages over USD 28 billion assets under management and custody worldwide.

You know your investments are safe with us. Expand your investment universe outside of Austraila and reach across the globe. PhillipCapital has access to exchanges across the world. Expert, Quality Advice Professional, fully accredited and friendly advisors can help tailor the perfect solution to your needs. Global Strength and Size Established in Singapore inPhillipCapital operates across 16 countries, has over 1 million clients and manages over USD 28 billion assets under management and custody worldwide.

Gateway to Americas, Asia and Europe Expand your investment universe outside of Austraila and reach across the globe. Speak to an Index put options strategy Request a Callback:

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In finance, a put or put option is a stock market device which gives the owner of a put the right, but not the obligation, to sell an asset the underlying , at a specified price the strike , by a predetermined date the expiry or maturity to a given party the seller of the put.

The purchase of a put option is interpreted as a negative sentiment about the future value of the underlying. Put options are most commonly used in the stock market to protect against the decline of the price of a stock below a specified price. In this way the buyer of the put will receive at least the strike price specified, even if the asset is currently worthless. If the strike is K , and at time t the value of the underlying is S t , then in an American option the buyer can exercise the put for a payout of K-S t any time until the option's maturity time T.

The put yields a positive return only if the security price falls below the strike when the option is exercised. A European option can only be exercised at time T rather than any time until T , and a Bermudan option can be exercised only on specific dates listed in the terms of the contract. If the option is not exercised by maturity, it expires worthless.

The buyer will not exercise the option at an allowable date if the price of the underlying is greater than K. The most obvious use of a put is as a type of insurance. In the protective put strategy, the investor buys enough puts to cover his holdings of the underlying so that if a drastic downward movement of the underlying's price occurs, he has the option to sell the holdings at the strike price.

Another use is for speculation: Puts may also be combined with other derivatives as part of more complex investment strategies, and in particular, may be useful for hedging. By put-call parity , a European put can be replaced by buying the appropriate call option and selling an appropriate forward contract.

The terms for exercising the option's right to sell it differ depending on option style. A European put option allows the holder to exercise the put option for a short period of time right before expiration, while an American put option allows exercise at any time before expiration. The put buyer either believes that the underlying asset's price will fall by the exercise date or hopes to protect a long position in it. The advantage of buying a put over short selling the asset is that the option owner's risk of loss is limited to the premium paid for it, whereas the asset short seller's risk of loss is unlimited its price can rise greatly, in fact, in theory it can rise infinitely, and such a rise is the short seller's loss.

The put writer believes that the underlying security's price will rise, not fall. The writer sells the put to collect the premium. The put writer's total potential loss is limited to the put's strike price less the spot and premium already received. Puts can be used also to limit the writer's portfolio risk and may be part of an option spread. That is, the buyer wants the value of the put option to increase by a decline in the price of the underlying asset below the strike price.

The writer seller of a put is long on the underlying asset and short on the put option itself. That is, the seller wants the option to become worthless by an increase in the price of the underlying asset above the strike price.

Generally, a put option that is purchased is referred to as a long put and a put option that is sold is referred to as a short put. A naked put , also called an uncovered put , is a put option whose writer the seller does not have a position in the underlying stock or other instrument.

This strategy is best used by investors who want to accumulate a position in the underlying stock, but only if the price is low enough.

If the buyer fails to exercise the options, then the writer keeps the option premium as a "gift" for playing the game. If the underlying stock's market price is below the option's strike price when expiration arrives, the option owner buyer can exercise the put option, forcing the writer to buy the underlying stock at the strike price.

That allows the exerciser buyer to profit from the difference between the stock's market price and the option's strike price. But if the stock's market price is above the option's strike price at the end of expiration day, the option expires worthless, and the owner's loss is limited to the premium fee paid for it the writer's profit.

The seller's potential loss on a naked put can be substantial. If the stock falls all the way to zero bankruptcy , his loss is equal to the strike price at which he must buy the stock to cover the option minus the premium received.

The potential upside is the premium received when selling the option: During the option's lifetime, if the stock moves lower, the option's premium may increase depending on how far the stock falls and how much time passes. If it does, it becomes more costly to close the position repurchase the put, sold earlier , resulting in a loss. If the stock price completely collapses before the put position is closed, the put writer potentially can face catastrophic loss.

In order to protect the put buyer from default, the put writer is required to post margin. The put buyer does not need to post margin because the buyer would not exercise the option if it had a negative payoff. A buyer thinks the price of a stock will decrease. He pays a premium which he will never get back, unless it is sold before it expires.

The buyer has the right to sell the stock at the strike price. The writer receives a premium from the buyer. If the buyer exercises his option, the writer will buy the stock at the strike price. If the buyer does not exercise his option, the writer's profit is the premium.

A put option is said to have intrinsic value when the underlying instrument has a spot price S below the option's strike price K. Upon exercise, a put option is valued at K-S if it is " in-the-money ", otherwise its value is zero. Prior to exercise, an option has time value apart from its intrinsic value.

The following factors reduce the time value of a put option: Option pricing is a central problem of financial mathematics. Trading options involves a constant monitoring of the option value, which is affected by changes in the base asset price, volatility and time decay.

Moreover, the dependence of the put option value to those factors is not linear — which makes the analysis even more complex. The graphs clearly shows the non-linear dependence of the option value to the base asset price.

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