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Tick trading binary options strategy pdf free
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The subject line of the email you send will be "Fidelity. In return for paying a premium, the buyer of a put gets the right not the obligation to sell the underlying instrument at the strike price at any time until the expiration date. Speculators who buy puts hope that the price of the put will rise as the price of the underlying falls. Since stock options in the U. However, speculators typically do not want to have a short position in the underlying shares, so puts that are purchased to speculate are usually sold before the expiration date.
The maximum potential profit is equal to the strike price of the put minus the price of the put, because the price of the underlying can fall to zero. Risk is limited to the premium paid plus commissions, and a loss of this amount is realized if the put is held to expiration and expires worthless.
Buying a put to speculate requires a 2-part bearish forecast. The forecast must predict 1 that the stock price will fall so the put increases in price and 2 that the stock price decline will occur before option expiration. Buying a put to speculate on a predicted stock price decline involves limited risk and two decisions. The maximum risk is the cost of the put plus commissions, but the realized loss can be smaller if the put is sold prior to expiration. The first decision is when to buy a put, because puts decline in price when the stock price remains constant or rises.
The second decision is when to sell, because unrealized gains can disappear if the stock price reverses course and rises. Many investors who buy puts to speculate have a target price for the stock or for the put, and they sell the put when the target is reached or when, in their estimation, the target price will not be reached. Put prices, generally, do not change dollar-for-dollar with changes in the price of the underlying stock.
Rather, puts change in price based on their "delta. Volatility is a measure of how much a stock price fluctuates in percentage terms, and volatility is a factor in option prices. As volatility rises, option prices tend to rise if other factors such as stock price and time to expiration remain constant.
As a result, long put positions benefit from rising volatility and are hurt by decreasing volatility. This is known as time erosion. Long puts are hurt by passing time if other factors remain constant.
The owner of a put has control over when a put is exercised, so there is no risk of early assignment. If a put is exercised, then stock is sold at the strike price of the put.
If there is no offsetting long or owned stock position, then a short stock position is created. Therefore, if a speculator wants to avoid having a short stock position when a put is in the money, the put must be sold prior to expiration.
When puts are purchased to speculate, it is assumed that the investor does not want to have a short stock position. In many cases, in fact, there is not sufficient equity in the account to cover the margin requirement for a short stock position.
Therefore, it is generally necessary for speculators to watch a long put position and to sell the put if the target price is reached or if the put is in the money as expiration approaches.
A protective put position is created by buying or owning stock and buying put options on a share-for-share basis. In return for receiving the premium, the seller of a put assumes the obligation of buying the underlying instrument at the strike price at any time until the expiration date.
Reprinted with permission from CBOE. The statements and opinions expressed in this article are those of the author. Fidelity Investments cannot guarantee the accuracy or completeness of any statements or data. Options trading entails significant risk and is not appropriate for all investors. Certain complex options strategies carry additional risk.
Before trading options, please read Characteristics and Risks of Standardized Options. Supporting documentation for any claims, if applicable, will be furnished upon request.
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