Short Put Strategy
The buyer of a put option has the right to sell the underlying asset at the exercise price of the option, and the seller of the put option has the obligation to buy the underlying asset at the exercise price of the option. By assuming the obligation to buy the underlying asset at a specific price, the seller of the put option receives the premium for the option. If the price of the underlying asset rises, the put option expires worthless and the seller of the put option does not lose money because of the assignment. By buying the underlying asset, the seller of the put option can obtain the maximum profit, which is the premium when selling the put option. Of course, the seller of a put option has significant downside risk, and when the price of the underlying asset falls significantly, the loss for the seller of the put option will become very large.
1.1 Strategy Overview
Trend: Bullish or Neutral
Volatility: N/A
Asset Leg: Selling Put Options
Maximum risk: no upper limit
Maximum profit: There is an upper limit
Strategy Type: Income Strategy
1.2 Strategy risks and benefits
Traders who sell put options are bullish, or at least neutral, on changes in the price of the underlying asset. If the price of the underlying asset rises at expiration or the price of the underlying asset does not change at expiration, then the put option expires worthless and will not be assigned, and the investor can obtain all the premium income. If the put option is out-of-the-money, then the entire put option premium is composed of time value. For in-the-money options, time value only makes up a small part of the premium. Generally speaking, initially selling out-of-the-money puts is a more prudent strategic approach, while initially selling in-the-money puts is a more aggressive approach.
For the strategy of selling in-the-money put options, you can obtain more premiums at the beginning of the strategy than selling out-of-the-money options, which means that the potential profit space of the strategy is greater, but correspondingly, the potential risks of the strategy are also Then it intensified. If the price of the underlying asset rises high enough at expiration, then selling real-valued options can result in higher premium income. However, when the price of the underlying asset falls, even if the decline is not that large, the seller of real-valued options will lose money. It will also be faster than selling out-of-the-money options.
1.3 Follow-up actions
If the price of the underlying asset falls and the put option position is sold at a loss, the investor will then take some protective follow-up action. The simplest action is to close the position promptly and accept a small loss. Since in-the-money options tend to lose time value quickly, investors tend to suffer smaller losses if the price of the underlying asset moves in a direction unfavorable to the strategy.
Of course, in addition to obtaining the premium, the put option selling strategy is also a strategy worth adopting if investors want to buy the corresponding underlying assets at a price lower than the market price. This strategy is beneficial to investors who ultimately want to hold the underlying asset. If the price of the underlying asset rises and they are not able to obtain the underlying asset through being assigned, then the investor will at least have the put option premium income to compensate for their efforts.
Although the strategy of selling put options may seem benign, there are still risks in pursuing this strategy: if the price of the underlying asset plummets, a huge loss will be incurred; because the collateral requirements are quite low and therefore have high leverage, then if the price of the underlying asset In the process of falling, investors will face the risk of bankruptcy.
1.4 Python practice
Underlying asset: ChinaAMC SSE 50 ETF
Options: 50ETF Call Options
Backtesting time: June 1, 2022 - July 20, 2022
Idea: Sell put options, swap positions at the end of the month, and calculate the net value of the options contract strategy for the first to third levels of virtual value and the first to third level of real value respectively.
Part of the code:
class Short_Put(object):
def __init__(self,st,k):
self.st=st
self.k=k
def option_value(self):
return -np.maximum(self.k-self.st,0)
def plot_return(self):
value=self.option_value()
plt.figure(figsize=(10,4))
plt.plot(st,value,label='Short_Put')
plt.xlabel('st')
plt.ylabel('return')
plt.legend(loc='upper left')
plt.show()
st=np.arange(50,100,5)
k=70
Short_Put(st,k).plot_return()Short_Put_return
Strategy Equity Curve:
Strategy indicators:
