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A covered put is a put option sold against a short futures position. Premium income is earned if futures prices are stable to lower. In the event the options contract is exercised, it will be offset by the short futures position. This position is bearish and is helped by reduced volatility and the passage of time.

Profits are limited on the downside; losses are unlimited as prices rally. For a hedger, the premium of the put increases income, while offsetting the price level of the physical product.

Position
Premium
Dollar Premium
Delta
Buy one $20 crude oil futures 0000 -1.00
Sell one $18 put $0.50$500 +.29
- Net Credit $0.50 $500 00
- Net delta 0000 00
00 0000 00
Maximum risk Unlimited on the upside00 -.71
Maximum profit $2.50 per barrel or $250 per position00 00
Break-even futures price $20.50 00 00

Position
Premium
Dollar Premium
Delta
Sell one $260 gold futures 0000 -1.00
Sell one $250 gold put $3.00$300 +.30
- Net Credit $3.00 $300 00
- Net delta 0000 00
00 0000 00
Maximum risk Unlimited on the upside00 -.70
Maximum profit $13.00 per oz. or $1,300 per position00 00
Break-even futures price $263 per oz. 00 00

  

*Information Courtesy of



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