Friday 11 December 2015

Is it possible to create a trade that will never lose?

The answer is yes with the help of options! While buying options can protect a stock (see here),  buying options can also lock-in a profitable position to ensure the position will never lose.

Let say we purchase Apple stock at $120 and the stock moves up to $130.

We buy a Put options by paying say $2 at $128 strike to lock-in our profitable position.
1) If Apple stock drops to $100
  a) Stock - We lose $20 ($120 - $100)
  b) Put Options - We profit $26 ($128 - $100 -$2)
  c) Our net position -  We profit $6 ($26 - $20)

2) If Apple stock drops to $50 
  a) Stock - We lose $70 ($120 - $50)
  b) Put Options - We profit $76 ($128 - $50 -$2)
  c) Our net position -  We profit $6 ($76 - $70)

3) If Apple stock rises to $140 
  a) Stock - We profit $20 ($140 - $120)
  b) Put Options - We lose $2 (Put Options OTM and become worthless, we lose our premium paid)
  c) Our net position -  We profit $18 ($20 - $16)

4) If Apple stock rises to $180 
  a) Stock - We profit $60 ($180 - $120)
  b) Put Options - We lose $2 (Put Options OTM and become worthless, we lose our premium paid)
  c) Our net position -  We profit $58 ($20 - $16)

Using options to lock-in a profitable position creates a peace of mind. :)








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