Options Strategies Term Paper

Open, View, and/or
Download this Document

Total Length: 759 words ( 3 double-spaced pages)

Total Sources: 2

Page 1 of 3

Finance

If I own Apple stock and I feel that there is significant risk that the stock might decline in the next few months, there are a few different option strategies that might help to address this situation. Some strategies actively seek to protect value, while other strategies are more in line with trying to capitalize on the expected downturn in the value of the stock. The current price of Apple stock is $604.71. For the examples, it will be assumed that there are transaction costs.

The first strategy to try to protect some value for the stock is to purchase a put option. The put option gives the holder of the put the option of selling the stock at a certain price. Let's say that we want to protect this portfolio at $575.00. To buy a put on Apple at $575 will cost $12.75 for an August 16th expiry. The put protects the portfolio is that if the value of Apple drops below $575, then we will be able to sell the stock at $575 anyway, because we have paid for the right to sell the put at $575. The put is revenue neutral at $604.71 - $12.

Stuck Writing Your "Options Strategies" Term Paper?

View All Our Example Options Strategies Term Paper

Have A Custom Example Essay Written

75 = $591.96

What this means is that the cost of the put for August has time value of 575-591.96 = $16.96.

Under this scenario, the put only really pays for itself if the stock drops that much past $575, but the price of the bond is based in part on the volatility of the underlying asset. In other words, the market expects that there is a reasonable chance the underlying asset will price under $575 by expiry.

This might seem like a steep cost to pay for protection, but consider what might happen if Apple is trading at $540 when at the expiry date. The stock would have lost:

$604.71 -- 540 = $74.71

Instead the stock is sold at $575 and the loss is:

$604.71 - $575 = $29.71 + $12.75 = $42.46 At this level the put has paid off in terms of offering downside protection, but the high cost of the put means that the market for Apple stock has to diminish considerably before this put position is profitable. Mostly, you.....

Show More ⇣

     Open the full completed essay and source list


OR

     Order a one-of-a-kind custom essay on this topic


sample essay writing service

Cite This Resource:

Latest APA Format (6th edition)

Copy Reference
"Options Strategies" (2014, May 21) Retrieved July 2, 2025, from
https://www.aceyourpaper.com/essays/options-strategies-189337

Latest MLA Format (8th edition)

Copy Reference
"Options Strategies" 21 May 2014. Web.2 July. 2025. <
https://www.aceyourpaper.com/essays/options-strategies-189337>

Latest Chicago Format (16th edition)

Copy Reference
"Options Strategies", 21 May 2014, Accessed.2 July. 2025,
https://www.aceyourpaper.com/essays/options-strategies-189337
   

Open, View, and/or
Download this Document
order custom essay example