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So far, we cover only bullish strategies. Today, we will touch base
with two bearish strategies for a change.
After analyzing IBM stock, we are bearish about the stock. As an
option trader, we can either buy long put or sell short call.
If we buy IBMUD put for $4.95/share or $495/contract, we are an
option buyer and the stock has to move below $115.05 ($120 - $4.95) for
us to make money. Notice the stock is currently traded above $115.05, so
it has to move down for us to be profitable. When we buy long put, our
loss is limited to the premium we paid and time is against us. We trade a
limited risk for a potentially larger profit with smaller winning
probability.
If we sell IBMID call for $2.90/share or $290/contract, we are an
option seller and the stock can move sideway or down for us to make
money. In this case, IBM can move up a bit and as long as it traded below
$122.90 ($120 + $2.90), we are profitable. Notice IBM is currently traded
below $122.90; hence, we have a better chance for a profitable trade
here. When we sell short call, our gain is limited to the premium we
collected and time is with us. We trade a limited gain for a potentially
lesser profit with larger winning probability.
Notice we buy ITM put and sell OTM call. That is a conservative
bearish option strategy. However, selling naked option is an advanced
strategy and hence, it is not recommended for beginner. I will get into
safer option strategies for beginner in the subsequent lessons.
Dennis Phan 潘家墉
18
August 2009
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