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8. Short Put
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Scenario:
This trader feels very strongly that Australian Dollar futures will not fall. He thinks, though, that the market has an equal chance of going up or leveling out. He also expects implied volatility to fall about 11%. The trader decides to sell a put option.
Specifics:
| Underlying Futures Contract: | March Australian Dollar | |
| Futures Price Level: | 0.5500 | |
| Days to Futures Expiration: | 50 | |
| Days to Options Expiration: | 40 | |
| Option Implied Volatility: | 14.1% | |
| Option Position: | Short 1 Mar 0.5500 Put | + .0111 ($1110) |
At Expiration:
| Breakeven: | 0.5389 (0.5500 strike - 0.0111 credit) | |
| Loss Risk: | Unlimited; with losses increasing as futures fall past 0.5389 breakeven. | |
| Potential Gain: | Limited to the premium received 0.0111 ($1110). This occurs when futures is above 0.5500 strike at option expiration. | |
Things to Watch:
As with all unlimited risk situations, the trader must watch this position carefully. Special consideration must be give to foreign currency trading, due to foreign and domestic central bank policy changes. The worst scenario is to be in this position with volatility rising and futures falling. Always re-evaluate this position at some predetermined point.
Follow-up Trading Strategies
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Contents Courtesy of CME.com