Overview
On 31 May 2024, I engaged in a vertical put spread strategy on GOLD $Barrick Gold Corp(GOLD)$ by opening two contracts. This involved selling put options at a strike price of USD 17 and simultaneously buying put options at a strike price of USD 16, collecting an option premium of USD 33 per contract. The contracts were set to mature on 19 July 2024. Subsequently, I closed the position on 8 July 2024 by paying USD 20 per contract.
Strategy Analysis
The vertical put spread is a limited-risk, limited-reward strategy that aims to capitalize on stable or slightly bullish market conditions. By selling the higher strike price put and buying the lower strike price put, the maximum potential profit is limited to the net premium collected, while the maximum potential loss is the difference between the strike prices minus the net premium collected.
Initial Position:
Sold put option (strike price: USD 17) and bought put option (strike price: USD 16)
Collected premium: USD 33 per contract
Total premium collected: USD 66 (for 2 contracts)
Closing Position:
Paid USD 20 per contract to close the position
Total cost to close: USD 40 (for 2 contracts)
Profit and Loss Calculation
The net premium collected initially was USD 33 per contract, and closing the position cost USD 20 per contract. Therefore, the net profit per contract is calculated as follows:
Net Premium per Contract:
Initial Premium−Closing Cost=USD33−USD20=USD13
Total Net Profit for 2 Contracts:
2×USD13=USD26
Reflection and Insights
Profit Realization:
By closing the position early and locking in a net profit of USD 26, I mitigated the risk of potential adverse price movements as the maturity date approached. The decision to close the position before maturity ensured that I realized a profit instead of risking potential losses due to market volatility.
Risk Management:
This strategy demonstrates effective risk management. The vertical put spread limited potential losses to a predefined amount while still allowing for a reasonable profit. By closing the position when the market conditions were favorable, I effectively managed risk and secured gains.
Market Conditions:
The decision to close the position on 8 July 2024 suggests that market conditions had stabilized or improved to a level where it was advantageous to exit the trade. This indicates a good understanding of market dynamics and the ability to react promptly to changing conditions.
Learning Points:
Timely Exit: Closing the position before maturity can be beneficial to lock in profits and avoid uncertainties.
Strategy Selection: Vertical put spreads are effective for capitalizing on stable or moderately bullish market conditions while limiting risk.
Risk vs. Reward: The strategy effectively balanced risk and reward, resulting in a positive outcome.
Conclusion
The vertical put option strategy on GOLD was executed successfully, resulting in a net profit of USD 26. This experience underscores the importance of selecting appropriate strategies, managing risks, and being proactive in closing positions when market conditions are favorable. The investment decision not only demonstrated sound strategy but also effective risk management, leading to a successful outcome.
$GOLD VERTICAL 240719 PUT 17.0/PUT 16.0$
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