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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Options Risk Disclosure: An option on a commodity futures contract is a right, purchased for a certain price, to either buy or sell a commodity futures contract during a certain period of time for a fixed price. Although successful commodity options trading requires many of the same skills as does successful commodity futures trading, the risks involved are somewhat different. For example, if a customer buys an option (either to sell or purchase a futures contract or commodity), the customer will pay a “premium” representing the market value of the option. Unless the price of the futures contract underlying the options changes and it becomes profitable to exercise or offset the option before it expires, the customer’s account may lose the entire amount of such premium (together with the costs of commissions and fees incurred to purchase such options). Conversely, if a customer sells an option (either to sell or purchase a futures contract or commodity), the customer will be credited with the premium but will have to deposit margin due to its contingent liability to take or deliver the futures contract underlying the option in the event the option is exercised. The writer of the option is however at unlimited risk with respect to the call option written, and risk on the put option of the amount should the price of the futures contract drop to zero. Sellers of options are subject to the loss which occurs in the underlying futures position (less any premium received). The ability to trade in or exercise options may be restricted in the event that such trading on U.S. commodity exchanges is restricted by both the CFTC and such exchanges, and it has been at certain times in the past.
