Put options (Insurance)

[stargazer]

Hi all

I am considering a strategy to basically protect myself from severe downturn as in GFC and am looking at put options as a way of as is described by some taking out insurance on your shares.

example
company xyz
last price $15.00

say i buy 10,000 @ $15.......$150,000
say i buy a 12 month put option for strike price of $15

Cost say $2500

Total outlay 152500.

now my understanding is that i have the right to sell but not the obligation.

So 7 months three things can happen

-price has gone up to $25.....here can i sell and take the profit or onsell the put option not clear in this area...redo another option for same strike price $25 12 months out for a premium cost of say $3000

-price the same......here dont need to do anything if i chose not to

-price down to say $5....here i can sell if i want for $15

Is there any other risks than the premium of the put option.

*Where can i find the volume etc on asx for options of companies say top 50 or other.

cheers
SG

 

[wayneL]

Hi all

I am considering a strategy to basically protect myself from severe downturn as in GFC and am looking at put options as a way of as is described by some taking out insurance on your shares.

example
company xyz
last price $15.00

say i buy 10,000 @ $15.......$150,000
say i buy a 12 month put option for strike price of $15

Cost say $2500

Total outlay 152500.

If you cover the whole lot it would be more like $25,000

now my understanding is that i have the right to sell but not the obligation.

Yes you have the right to sell but not the obligation to sell the underlying shares.

So 7 months three things can happen

-price has gone up to $25.....here can i sell and take the profit or onsell the put option not clear in this area...redo another option for same strike price $25 12 months out for a premium cost of say $3000

Your put option will be worthless, but you can roll it up to lock in the higher price, but as indicated before, it will cast you a lot more than $3k

-price the same......here dont need to do anything if i chose not to

Correct

-price down to say $5....here i can sell if i want for $15

Correct. But if the option has any remaining extrinsic value (which it may or may not), you would be better to sell the option and sell the shares. If no extrinsic value, just exercise.

Is there any other risks than the premium of the put option.

No

 

[stargazer]

Many thanks for taking the time to reply Wayne.

SG