Theoretically speaking, the strategy of usinga a covered put is to anticipate a slight decline or moderate fluctuation in the stock market later, but in the actual application of the stock market, due to relatively high construction costs and limited liquidity, this strategy is rarely used. Here, we use this strategy as a knowledge point to learn.

How to build

The standby put option strategy consists of two parts of trading:

● Short selling stocks

● Sell put

The number of shares sold short is equal to the number of shares corresponding to the PUT

Strategy brief

Ready to trade a put option. Theoretically speaking, the so-called reserve uses a short selling position to cover the risk exposure of selling a put.

In actual application, short selling targets are generally the main trading part of this strategy.

In futures trading, investors use this strategy when they believe that the underlying market will fluctuate moderately downward in the future — while holding short positions, they use selling put-income to enhance profits.

However, the stock market rarely uses this strategy for two reasons:

First, it is limited to shorting stocks.

Shorting stocks not only requires interest, but the range and number of stocks that can be shorted is limited by exchanges and brokers.

Second, preparing to sell a put option is basically the same as the purpose, risk and return of a bare selling call, but the cost is higher.

Redeeming put options and naked selling calls is a strategy that is not bullish on the future market, with limited returns and unlimited risks.

However, short selling stocks with prepared put options requires interest costs. In addition, the strategy has two parts of trading, and the overall transaction fee is also higher. Investors can completely use bare selling calls instead of selling the standby put option strategy.

Risks and benefits

● Break-even point

Stock price = stock sale price+option premium

● Maximum profit

Maximum profit = stock sale price - exercise price+option premium

● Maximum loss

The maximum loss is unlimited

Examples of calculations

Let's say TUTU is a company listed on the NASDAQ exchange.

You think TUTU will decline moderately in the future. It shorted 100 shares of TUTU at a price of 50 US dollars per share, and at the same time sold 1 put with an exercise price of 45 US dollars at 5 US dollars. This forms a strategy to sell put options ready to be redeemed.

At maturity, your earnings are as follows (interest and other fees for short stock sales are not calculated):

Remarks:

1. The article uses stocks as option targets to explain strategies. The actual investment bid can also be stock indices, futures contracts, bonds, currencies, etc.;

2. Unless otherwise specified, all options in this article refer to on-market options;

3. The TUTU company in the article is a virtual company;

4. The relevant calculations in this article do not take into account handling fees. In actual options investment, investors need to consider transaction costs.