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Trade Of The Week: Long Put

August 12, 2020

Trade Of The Week: Long Put

You enter into a long put position when you expect the market to fall significantly. Your objective is to experience a large move and either hold to expiry, or close out the position early to lock in your profits. A long put can be highly profitable when the market falls rapidly.

You enter into a long put position when you expect the market to fall significantly. Your objective is to experience a large move and either hold to expiry, or close out the position early to lock in your profits. A long put can be highly profitable when the market falls rapidly.

On Thursday 6th of August 2020 during ‘The Next Big Trade’ webcast, Ivan Tchourilov discussed a trade that he has made on his portfolio. 

Setting up the trade involves buying an out-of-the-money put option at strike price A. In Ivan’s case, this strike price was 5750.

By purchasing this option out-of-the-money, you are entering the position at a lower premium and you experience less time decay due to the lower premium paid upfront. The downside of this strategy is that the market will have to fall further to be profitable. However, in the instances these large movements occur, the position can be very profitable.

Ivan’s trade was set up as follows:
BUY XJO 5750 October 15 2020 Put (E)

On 11/8/20 the market is currently at 6130.0. This position can be entered into for a premium around $956 per contract. The breakeven point for this strategy on expiry is 5684, however there are a range of break even points before expiry visible on the chart below, where the coloured lines cross the x-axis at ‘0’. The coloured lines represent the profit of a position at a given point in time, given the price of the underlying asset (XJO Index).

Ivan selected the expiry date as October 15 2020 so he has some time for the market to move. His plan is to close out the position as the market moves close to 5750 so he can lock in the profits before expiry. As the market approaches the 5750 level, the put option’s delta will accelerate toward -1, with the position rapidly increasing in value as the market falls. However, the closer we move towards the October expiry, the more rapidly time decay will erode the value of the long put position.

 

To try trading for yourself using the most powerful Options Trading technology in Australia, click here for a trial for our Implied Volatility platform.

We wish you good luck with your trading, and as always if you have any questions, please feel free to contact our trading desk on (03) 8080 5795.

 

Past returns do not reflect future returns. 

Trading options is not suitable for everyone. There is a risk that you can lose more than the value of a trade or its underlying assets. You should only trade if you are confident that you fully understand what you are doing. If you are thinking about acquiring a financial product, you should consult our Financial Services Guide (FSG) at www.reachmarkets.com.au first. 

 


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