Buy Put Strategy (Long Put)
In many ways, puts and related strategies are almost the opposite of call-based strategies, but this is not always the case. In its simplest form, the put option strategy involves buying or selling a put option. For the strategy of buying put options, investors hope that the price of the underlying asset will fall, so that the put option will become more valuable. If the price of the underlying asset falls far enough below the strike price of the put option, the holder of the put option will make a profit.
Buying put options provides investors with leverage during a downward movement in the price of the underlying asset, and this strategy is also an alternative to the strategy of shorting the underlying asset.
1.1 Strategy Overview
Trend: Bearish
Volatility: N/A
Asset Leg: Buy Put Options
Maximum risk: There is an upper limit
Maximum profit: no upper limit
Strategy Type: Net Expenditure; Capital Gains
1.2 Select a put option to buy
There are several methods for determining which put option to buy. Compared with in-the-money options, out-of-the-money options have higher potential returns and corresponding greater potential risks. If the price of the underlying asset falls, buying cheaper out-of-the-money options provides a greater percentage gain. If the price of the underlying asset does not fall significantly, then in-the-money options are a better choice. Generally speaking, put options tend to lose their time value more quickly after they become in-the-money options, and there are even greater benefits to buying in-the-money options.
1.3 Follow-up actions
Investors who buy put option strategies need to take follow-up actions after establishing a position, either to lock in profits or to improve losses. Generally speaking, unless the investor wants to use the underlying assets or sell the underlying assets, it is often not a good method to close the position through exercise.
① Lock in profits: After buying a put option strategy, when investors have a large amount of unrealized profits in their positions, they can adopt the following strategies. 1. Sell put options to close the position and withdraw profits. 2. Do nothing and continue to hold this position. 3. Sell in-the-money options to go long and use part of the income to continue buying multiple out-of-the-money put options. 4. While holding the original position, sell one out-of-the-money option to construct a spread position. 5. Buy a call option on the market to protect the original put option position.
The practice of selling put options to close the position is the most conservative of all the above practices, but it is not necessarily the worst. Even if this approach does not leave any room for the profit of the position to increase, it also eliminates all accumulated losses. The possibility of losing profits. The second method of doing nothing and continuing to hold the position is a more radical behavior. If the price of the underlying asset changes direction and moves upward at this time, and rises above the exercise price of the put option on the expiration date, then the original Profitable positions will be worthless, but investors can accumulate more profits as the underlying asset price continues to move downward. These two practices are the simplest behaviors, and the remaining practices are a balance between retaining original profits and accumulating more profits. The third method is to use the proceeds from selling put options to purchase a larger number of put options with strike prices lower than the former, in order to recover the cost from the market and continue to obtain profits. After recouping the initial cost, this strategy becomes risk-free. Even if the new put option position expires worthless, the investor has recovered his principal. However, if the price of the underlying asset drops sharply, then the investor will have a loss. Huge profits. The fourth method is to hold the original position and then sell put options with lower exercise prices, thereby creating a bear market spread. Selling put options with lower exercise prices can obtain premiums to make up for the initial loss. Cost of opening a position. The advantage of this is that when the price of the underlying asset rises, it can reduce the cost of opening a position. When the price of the underlying asset falls, its income is limited. Investors can obtain a limited maximum profit, which is the difference between the exercise prices of the two put options (regardless of procedures). fee). The fifth approach is to retain the original position and buy a call option at the same time, thereby constructing a straddle strategy. No matter whether the price of the underlying asset moves upward or downward, this investment can make a profit. When the price of the underlying asset moves, If the range is between the two strike prices, there will be a limited loss, which is the premium paid by the two long positions.
②Stop-loss action: When a loss occurs in the put option buying strategy, the simplest stop-loss action is to sell the position to close the position and bear the floating loss, but this is not the wisest approach. For long put option positions with losses, you can consider moving the position upward to construct a short-hand spread or establish a inter-temporal spread. Both methods can help investors recover part of their losses. By selling two puts with the same strike price as the original position and buying one put with a higher strike price, the investor now has a short put option with a lower strike price and a long put option with a higher strike price. This is also a bear market spread combination. In this way, the break-even point of the investor's position is raised. If the price of the underlying asset drops slightly, the position is likely to achieve break-even, erasing the original loss. However, this approach will also limit the potential profit of this position.
1.4 Python practice
Underlying asset: ChinaAMC SSE 50 ETF
Options: 50ETF Call Options
Backtesting time: June 1, 2022 - July 20, 2022
Idea: Buy put options, swap positions at the end of the month, and calculate the out-of-the-money first-third and at-the-money option contract strategy net values respectively.
Part of the code:
class Long_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='Long_Put')
plt.xlabel('st')
plt.ylabel('return')
plt.legend(loc='upper left')
plt.show()
st=np.arange(50,100,5)
k=70
Long_Put(st,k).plot_return()Long_Put_return
Strategy Equity Curve:
Strategy indicators:
