Which profile best fits a short put position? A) Bullish, maximum gain is unlimited, maximum loss is the premium B) Bearish, maximum gain is the premium, maximum loss is unlimited C) Bearish, maximum gain is strike minus premium, maximum loss is the premium D) Bullish, maximum gain is the premium, maximum loss is strike minus premium
Bullish, max gain is premium, max loss strike minus premium, answer D
D
Dreary Wrote: ------------------------------------------------------- > Bullish, max gain is premium, max loss strike > minus premium, answer D Correct in the book it says D! However, I dont completely agree…I mean if you short a put you are not bullish, you just believe the price of the underlying will not fall or at most it will increase a lot. Therefore I think all of them are wrong.
When you buy a put, you are long, when you sell a put you are short. Bullish and bearish is related to the expected direction of the underlying. So, in this case, you have a short position, and you expect the stock to go higher, so you are bullish.
Dreary Wrote: ------------------------------------------------------- > When you buy a put, you are long, when you sell a > put you are short. > Bullish and bearish is related to the expected > direction of the underlying. > So, in this case, you have a short position, and > you expect the stock to go higher, so you are > bullish. I agree, but look at the payoff of a short put. Your upside is limited to the premium (if I am not wrong). So, believe me, if an investor is bullish will go long call not short put
Both are bulish: long call or short put, but of course their payoffs are different. If the payoff is different, it does not mean the smaller means bearish in any way. Think of it like this: 1) If you buy a put, you are bearish, right? Then if you sell a put you MUST be bullish. 2) If you buy a call you are bullish. If you sell a call you MUST be bearish.
I don’t know about that… Edit: StrangeDay’s post. Agree with Dreaery Take equity index options. Equity index options can have some really serious skew where OTM puts sell for much more than OTM calls. You can get really clubbed selling equity index puts (ask Victor Niederhoffer) so you really get rewarded for selling them. If you are bullish on equities and bearish on vol, sell equity puts. If you are bullish on equities, and bullish on vol, buy equity calls.
Dreary Wrote: ------------------------------------------------------- > Both are bulish: long call or short put, but of > course their payoffs are different. If the payoff > is different, it does not mean the smaller means > bearish in any way. Think of it like this: > > 1) If you buy a put, you are bearish, right? Then > if you sell a put you MUST be bullish. > > 2) If you buy a call you are bullish. If you sell > a call you MUST be bearish. I know this, but just consider this: if you are an investor and you are bullish on the stocks of Tesco. What would you do? A) Long call B) short put
strangedays Wrote: ------------------------------------------------------- > Dreary Wrote: > -------------------------------------------------- > ----- > > Both are bulish: long call or short put, but of > > course their payoffs are different. If the > payoff > > is different, it does not mean the smaller > means > > bearish in any way. Think of it like this: > > > > 1) If you buy a put, you are bearish, right? > Then > > if you sell a put you MUST be bullish. > > > > 2) If you buy a call you are bullish. If you > sell > > a call you MUST be bearish. > > > I know this, but just consider this: if you are an > investor and you are bullish on the stocks of > Tesco. > What would you do? > A) Long call > B) short put You would make the decision based on the vol skew and your feelings about upcoming volatility and your tolerance to gamma risk. Edit: BTW this is exactly the kind of place where finance professionals/CFA types distinguish themselves from joe-bag-of-donuts in the garage. You don’t look at maximum leverage/maximum gain stuff but the essence of the bet.
JoeyDVivre Wrote: ------------------------------------------------------- > strangedays Wrote: > -------------------------------------------------- > ----- > > Dreary Wrote: > > > -------------------------------------------------- > > > ----- > > > Both are bulish: long call or short put, but > of > > > course their payoffs are different. If the > > payoff > > > is different, it does not mean the smaller > > means > > > bearish in any way. Think of it like this: > > > > > > 1) If you buy a put, you are bearish, right? > > Then > > > if you sell a put you MUST be bullish. > > > > > > 2) If you buy a call you are bullish. If you > > sell > > > a call you MUST be bearish. > > > > > > I know this, but just consider this: if you are > an > > investor and you are bullish on the stocks of > > Tesco. > > What would you do? > > A) Long call > > B) short put > > You would make the decision based on the vol skew > and your feelings about upcoming volatility and > your tolerance to gamma risk. Exactly…which in simple words means that if expect high volatility you will go long call, otherwise short put. Is it correct Joey? 
Higher volatility than is implied by the option => buy option Lower volatility than is implied by the option+ ability to handle gamma => sell option Lower volatility than is implied by the option + no ability to handle gamma => some option combination like bull put spread
JoeyDVivre Wrote: ------------------------------------------------------- > Higher volatility than is implied by the option => > buy option > Lower volatility than is implied by the option+ > ability to handle gamma => sell option > Lower volatility than is implied by the option + > no ability to handle gamma => some option > combination like bull put spread Thanks Joey!
> What would you do? > A) Long call > B) short put In terms of degree of bullishness, yes you would go with the long call because it has the larger payoff. But both are bullish.
Dreary Wrote: ------------------------------------------------------- > > What would you do? > > A) Long call > > B) short put > > In terms of degree of bullishness, yes you would > go with the long call because it has the larger > payoff. But both are bullish. I would go long call…however as also Joey explained…you cannot really say it as you should also know the volatility and the gamma of the underlying. This is why the initial question, although D its the only answer which is more close to the aim of the strategy…it is not entirely correct (as it is too generic).
If you don’t have a vol bet, you wouldn’t do either -you would make a bet in the underlying stock. In retail investing, one of the purposes of options is to gain leverage. This is not really a problem in institutional investing. I’ve never seen a situation in which the prime broker would stop you from buying more equity before the risk manager would.
Guys, option D says maximum gain is premium… Doesnt look right… Say I enter short put for stock X at $10, ie i am going to buy X in future at $10. By expiry price could be anything say $100. I am gaining $90 for each stock right… so gain is unlimited… Any thoughts?
Selling a put is giving the buyer of the put the right to sell the underlying to you, and you have the obligation to buy it if the option is exercised. The owner of the put will exercise the option if the price of the underlying in the market goes down below the exercise price of the put, below the strike price, otherwise he would sell the underlying in the market. You sell the put in hopes that the underlying price is not going to drop, so the owner of the put would not exercise the option, you are bullish. Your maximum gain is the premium, you don’t get anything else than the premium. The maximum loss that you can incur is when the price of the underlying in the market goes down, the owner of the put exercise it, and then you will have to pay the strike price for the underlying, and you received the premium from the sell of the put. Your loss would be: strike-premium.
S - X - premium
in breif : Long put profit: max(0,X-St) -p0 Short put profit: p0- max(0, X-St) Break even @ St=X-p0 long max profit= X-p0 short max profit= p0 much easier to remember when u understand it and see it in a payoff diagram