When we decided to buy a stock, we might have experienced a fall in stock price, causing us to suffer from paper losses. The only way to recover from the paper loss is wait for the stock price to recover back to our cost price, which sometimes can take very long to happen.
But if we use options to trade stocks, with the power to convert time into money, it can be potentially profitable over time, even when the stock price falls and never really recovers, since we can make some small profit aswe sell puts over time.
Using $Tiger Brokers(TIGR)$as an example,supposed you sold 1 lot of put with strike price $5, expiry date 20210121, at existing stock price of $4.31. Assuming at the end of 20210121, the stock price falls to $4, and you got assigned, and as of now, you made some losses of $13. Since the cost = $500 - $87 (premium from January Put), while the present value of the stock is $400. If you sell away the stock at $4, you will have a realised loss of $13.
With option, you can actually ‘reset’ your position by selling a put with strike again at the next expiry date 20210218. At stock price of $4, the put should worth at least $1 (intrinsic value), such that overall you collect backmore than $500 ($87 from the first sold put,$400 from selling the shares, $100 from selling the second put).
This time round, you can hope that by 20210218, the stock price can increase above $5, such that the sold put turns expired and you will make a profit.
In the unfortunate situation wherethe stock price is still below $5 and you got assigned again, you can simply repeat this process. Repeat, until the put turns ‘out of the money’ so that you can profit.
As long as we have the time to wait, we will eventually profit [Happy]
The logic can be applied to selling calls too.
May you huat big big in 2022! Invest safe.
Comments
Not to mention that tiger Broker dont offer cash secured put strategy