To The Moon

With the escalating Russian-Ukrainian conflict and incoming Fed rate hike, “choppy” seems to define the stock market in 2022. In addition to the downside risks, the volatility is worse for retail investors who can never timely catch up with the market trends. How to hedge risks in a volatile market?

In last article, we shared two ways to short the market (buy call options, you can click How to Get Quick Money From a Downside Market). Today, we gonna show you how to use Short Put/Call to confront with volatility.

Before we get started, a quick wrap-up about call/put:

To put it simply:

Long Call/Put: you need to buy a contract. When you can correctly predict market trends, you will make a huge profit from it; if you fail,the loss is limited, i.e. the contract premium.

Short Call/Put: you don’t need to buy a contract. If your speculation is right, you earn the premium, which is limited; if it’s wrong, the loss is unlimited. 

Besides the trading types, there is a very important concept called "Premium".

Here is a chart to help you understand:

 Most investors can understand why we Long Call/Put: you can get considerable gains just with limited losses; but many investors may be confused about Short Call/Put:

Why do we trade with limited profit and potentially huge losses?

Short Put/Call can work in the volatile markets.

Let's take PDD as example:

In December 2021, Duan Yongping, known as China's Warren Buffett, traded 7,000 PDD Sell to Open PutOptions. The expiration date is January 22, 2022, with strike price at $50. One PUT containing 100 shares, and a premium of $4.90 per share.

It means by January 22, 2022:

• If $(PDD)$ share price is above $50 and Duan gets 7,000*100*4.9=$3.43 million (the total of premium).

• If PDD share price is below $50, Duan gets $3.43 million, but he also needs to fulfill his obligation to buy 700,000 shares at $50. It may lead to a huge loss = ($50 - closing price) * 700,000 - $3.43 million

With such a big risk, Duan trades the Sell Put for 3 reasons:

1. He is convinced that PDD will not fall below $50.

2. He deems that PDD less than $50 is worth buying.

3. He thinks PDD won’t surge in the short term, otherwise he would long call.

If I compare sell options (Sell Put/Call) to insurance, you can get it better.

When you Sell Put/Call, you act like an insurance company and immediately get the "car insurance premium"; but if there is acar crash, you need to pay a lot.

But generally, very few cars have accidents. That is to say, when you predict that the stock won’t fall below or rise above a certain price, you can trade Sell Put/Call.

In a volatile market, you don’t have to specifically predict the trend, rather to trade Sell Put/Call in a certain range. It will be easier and safer relatively.

But you should always be cautious about the losses, and the trend is the most important factor in your option trading!!! Don’t gamble on something you are not familiar with!!!

What's your opinion on PDD Short Put?

Do you have the plans for Short Put?

Share your thoughts with me and other Tigers~