Buying Rapeseed Put Options to Profit from a Fall in Rapeseed Prices

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Buying Rapeseed Put Options to Profit from a Fall in Rapeseed Prices

If you are bearish on rapeseed, you can profit from a fall in rapeseed price by buying (going long) rapeseed put options.

Example: Long Rapeseed Put Option

You observed that the near-month Euronext Rapeseed futures contract is trading at the price of EUR 292.50 per tonne. A Euronext Rapeseed put option with the same expiration month and a nearby strike price of EUR 290.00 is being priced at EUR 19.50/ton. Since each underlying Euronext Rapeseed futures contract represents 50 tonnes of rapeseed, the premium you need to pay to own the put option is EUR 975.00.

Assuming that by option expiration day, the price of the underlying rapeseed futures has fallen by 15% and is now trading at EUR 248.60 per tonne. At this price, your put option is now in the money.

Gain from Put Option Exercise

By exercising your put option now, you get to assume a short position in the underlying rapeseed futures at the strike price of EUR 290.00. In other words, it also means that you get to sell 50 tonnes of rapeseed at EUR 290.00/ton on delivery day.

To take profit, you enter an offsetting long futures position in one contract of the underlying rapeseed futures at the market price of EUR 248.63 per tonne, resulting in a gain of EUR 41.40/ton. Since each Euronext Rapeseed put option covers 50 tonnes of rapeseed, gain from the long put position is EUR 2,070. Deducting the initial premium of EUR 975.00 you paid to purchase the put option, your net profit from the long put strategy will come to EUR 1,095.

Long Rapeseed Put Option Strategy
Gain from Option Exercise = (Option Strike Price – Market Price of Underlying Futures) x Contract Size
= (EUR 290.00/ton – EUR 248.60/ton) x 50 ton
= EUR 2,070
Investment = Initial Premium Paid
= EUR 975.00
Net Profit = Gain from Option Exercise – Investment
= EUR 2,070 – EUR 975.00
= EUR 1,095
Return on Investment = 112%

Sell-to-Close Put Option

In practice, there is often no need to exercise the put option to realise the profit. You can close out the position by selling the put option in the options market via a sell-to-close transaction. Proceeds from the option sale will also include any remaining time value if there is still some time left before the option expires.

In the example above, since the sale is performed on option expiration day, there is virtually no time value left. The amount you will receive from the rapeseed option sale will be equal to it’s intrinsic value.

Learn More About Rapeseed Futures & Options Trading

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Writing Puts to Purchase Stocks

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Effect of Dividends on Option Pricing

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Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

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Leverage using Calls, Not Margin Calls

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Day Trading using Options

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What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Buying Rapeseed Put Options to Profit from a Fall in Rapeseed Prices

Definition:
A put option is an option contract in which the holder (buyer) has the right (but not the obligation) to sell a specified quantity of a security at a specified price (strike price) within a fixed period of time (until its expiration).

For the writer (seller) of a put option, it represents an obligation to buy the underlying security at the strike price if the option is exercised. The put option writer is paid a premium for taking on the risk associated with the obligation.

For stock options, each contract covers 100 shares.

Buying Put Options

Put buying is the simplest way to trade put options. When the options trader is bearish on particular security, he can purchase put options to profit from a slide in asset price. The price of the asset must move significantly below the strike price of the put options before the option expiration date for this strategy to be profitable.

A Simplified Example

Suppose the stock of XYZ company is trading at $40. A put option contract with a strike price of $40 expiring in a month’s time is being priced at $2. You strongly believe that XYZ stock will drop sharply in the coming weeks after their earnings report. So you paid $200 to purchase a single $40 XYZ put option covering 100 shares.

Say you were spot on and the price of XYZ stock plunges to $30 after the company reported weak earnings and lowered its earnings guidance for the next quarter. With this crash in the underlying stock price, your put buying strategy will result in a profit of $800.

Let’s take a look at how we obtain this figure.

If you were to exercise your put option after earnings, you invoke your right to sell 100 shares of XYZ stock at $40 each. Although you don’t own any share of XYZ company at this time, you can easily go to the open market to buy 100 shares at only $30 a share and sell them immediately for $40 per share. This gives you a profit of $10 per share. Since each put option contract covers 100 shares, the total amount you will receive from the exercise is $1000. As you had paid $200 to purchase this put option, your net profit for the entire trade is $800.

This strategy of trading put option is known as the long put strategy. See our long put strategy article for a more detailed explanation as well as formulae for calculating maximum profit, maximum loss and breakeven points.

Protective Puts

Investors also buy put options when they wish to protect an existing long stock position. Put options employed in this manner are also known as protective puts. Entire portfolio of stocks can also be protected using index puts.

Selling Put Options

Instead of purchasing put options, one can also sell (write) them for a profit. Put option writers, also known as sellers, sell put options with the hope that they expire worthless so that they can pocket the premiums. Selling puts, or put writing, involves more risk but can be profitable if done properly.

Covered Puts

The written put option is covered if the put option writer is also short the obligated quantity of the underlying security. The covered put writing strategy is employed when the investor is bearish on the underlying.

Naked Puts

The short put is naked if the put option writer did not short the obligated quantity of the underlying security when the put option is sold. The naked put writing strategy is used when the investor is bullish on the underlying.

For the patient investor who is bullish on a particular company for the long haul, writing naked puts can also be a great strategy to acquire stocks at a discount.

Put Spreads

A put spread is an options strategy in which equal number of put option contracts are bought and sold simultaneously on the same underlying security but with different strike prices and/or expiration dates. Put spreads limit the option trader’s maximum loss at the expense of capping his potential profit at the same time.

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Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

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Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

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Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

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Naked Puts Screener

Stocks: 15 20 minute delay (Cboe BZX is real-time), ET. Volume reflects consolidated markets. Futures and Forex: 10 or 15 minute delay, CT.

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About Naked Puts

Selling a naked put is an investment strategy very similar to a covered call. It can be used to generate additional premium income, but unlike a covered call, you do not own the underlying stock. Over 75% of options are held until expiration and expire worthless. So what is a naked put?

Using a naked put strategy, you sell put options on a stock you do not own, and earn the premium income if the option expires worthless. A naked put strategy is somewhat riskier than a covered call strategy, as you will be obligated to buy shares of the underlying stock at the strike price if the call is exercised before it expires.

  1. You sell (short) a put option against a stock (1 option controls 100 shares).

Thus, 1 Naked Put = short 1 put option.

The aggregate operation is typically known as naked put writing. It is called “naked” because should the option be exercised you will have to purchase the stock required to fulfill the delivery obligation for the 100 shares, as opposed to selling a covered call, where you own the underlying stock. In a worst-case scenario for an exercised naked put, the underlying stock falls to 0.00 and you are obligated to buy a worthless stock at the strike price.

Naked Puts Strategy: The page is initially sorted by descending “Potential Return”.

Options information is delayed a minimum of 15 minutes, and is updated at least once every 15-minutes through-out the day. The screener displays probability calculations based on the delayed stock price at the time the strategy is updated.

Main features of the Screener include:

  • Ability to add various filters, with hundreds of different combinations.
  • Save a Screener: When you’ve defined filters that you want to use again, save the screener.
  • Load a Saved Screener: Select a previously saved set of Screener filters to view today’s results.
  • View the Results using Flipcharts: Page through charts of the symbols on the results page.
  • Download the Results: Download up to 1000 results to a .csv file. The Download will also pull all of the data fields present on the View you use. Barchart Premier Members may download up to 100 .csv files per day.
  • Send an End-of-Day Email of a Screener’s Results: Barchart Premier Members can save a screener, and opt to receive 10, 25, or 50 results via email along with an optional .csv file of the top 1000 results. Emails are sent at 4:45pm CT Monday thru Friday.
Filters

Barchart Premier subscribers can add or modify different filters on the screener to find calls on the most favorable stock options.

Reordering Filters

Once filters are added, you may drag and drop them in the SET FILTERS tab to reorder the way they appear on the RESULTS tab (when using the Filters View). Each filter you add has the “Order” icon which is used to reposition it.

Since a Naked Put is written on stocks you do not own (but will be required to purchase if the option is exercised), a typical filter to add to this screener is the Symbol filter.

So you can focus on the best options, the screener starts by removing certain puts and calls from all strategies:

  • Break even must be greater than or equal to 0%.
  • The stock price must be greater or equal to 1.00
  • The options volume must be greater than or equal to 500.
  • The bid price must be greater than 0.05
  • Open interest must be greater than or equal to 100.
  • The option must not be an “adjusted” option (Ex: The option cannot be based on a split stock).
  • Moneyness is between -25% to -5% (OTM)
  • If the ask is greater than or equal to $5.00, the spread between the bid and ask must be less than or equal to 10% of the ask.
  • If the ask is between $2.00 and $5.00, the spread between the bid and ask must be less than or equal to 15% of the ask.
  • If the ask is between $1.00 and $2.00, the spread between the bid and ask must be less than or equal to 25% of the ask.
  • If the ask is less than $1.00, the spread between the bid and ask must be less than or equal to 50% of the ask.

Note: “Restricted options” (options quotes marked with an asterisk * after the strike price, and found on an individual symbol’s options page) are automatically removed from the screener. A “restricted option” is typically created after spin-offs or mergers, and are not tradeable.

Views

The Results page contains three standard views. You may switch the view using the links at the top of the screener results table. The Main View shows the Volume and Open Interest for each option, while the Dividend & Earnings View can be used to highlight strategies with upcoming dividends and earnings. The Filter view shows you the data contained in the field(s) you’ve added to the screener.

Main View

  • Symbol – the underlying equity. Clicking on the symbol will take you to the current quote page.
  • Last – the delayed stock price at the time the strategy is updated for the underlying equity.
  • Strike – the price at which the underlying security can be bought if the option is exercised.
  • Exp Date – the expiration date of the option.
  • Bid – the premium to purchase this option.
  • Break Even – the put strike price – bid price.
  • Break Even% – the likelihood of the the strategy breaking even.
  • Volume – the total number of options traded in the current day for a contract.
  • Open Interest – the total number of open option contracts in the market for a particular contract. The more popular the contract is with options traders, the greater the Open Interest. An opening transaction will increase the Open Interest, and a closing transaction will decrease it.
  • Delta – Delta measures the amount an option price will change as a result of a $1.00 price change of the underlying security. Since put options rise and fall directly with the price of the stock, they are assigned deltas between -100 to 0.
  • Potential Return% – the potential percentage of return for this strategy, calculated as bid / (strike – bid) * 100
  • Annualized Potential Return% – the annualized percentage of potential return for this covered call assuming the stock price remains the same (i.e. flat) until the option expiration. It is calculated as (Potential Return / Days Held) * 365 where Days Held is the number of days remaining until expiration.

Dividend & Earnings View

  • Dividend – the dividend the equity pays on the Ex-Dividend Date. On the morning of the Dividend Ex-Date, the stock’s price is lowered by the amount of the dividend that was just paid.
  • Dividend Ex-Date – the first day on which the stock trades without the dividend. If you wish to receive the dividend, you must own the stock by the close of market on the day before the Dividend Ex-Date. Many times, a covered call is exercised early so the buyer can own the stock and collect the dividend. This typically happens to ITM options the day before the Dividend Ex-Date.
  • Earnings Date – The date on which a company is expected to release their next earnings report. The prices are more volatile, which tends to inflate the prices of the near-the-money strikes. During a contract period when there is an earnings report due, the earnings announcement can dramatically shift the range in which the stock has been trading.
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