from default, the put writer is required to post margin. K-S(t) any time until the option's maturity time. As time passes, the blue graphs move "downwards until it reaches the orange graph (which is the profit / loss at expiry) this loss of value by the option is called "time decay". The put buyer either believes that the underlying asset's price will fall by the exercise date or hopes to protect a long position. Best and Worst Case Scenarios, lets use the example from the screenshot above to explain the best and worst case scenario for a short put strategy.
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If traders use this neutral to bullish option trading strategy, they will stand to make a axis bank forex account login profit that is limited by the premium received if their market view is correct. The put option premium paid to trader B for buying the contract of 100 shares at 5 per share, excluding commissions 500 (R). If the market then ends up above.4000 at expiration, the EUR put/USD call expires unexercised and the trader captures the entire premium received. Short Put Risk-Reward Ratio, the risk-reward ratio is usually quite unfavourable with a short put position, as the maximum possible loss is usually much higher than potential profit of the trade. In our example the maximum possible loss is equal to the strike price (45) less the initial option price (2.85 which.15 per share, or 4,215 for one option contract representing 100 shares. Still other traders might combine a short term sold binary put option with a longer term short position in the underlying as a covered put writing strategy. Why Traders Might Sell Binary Put Options. Puts may also be combined with other derivatives as part of more complex investment strategies, and in particular, may be useful for hedging. Trader A's total loss is limited to the cost of the put premium plus the sales commission to buy. the most obvious use of a put is as a type of insurance. He pays a premium which he will never get back, unless it is sold before it expires. 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.