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Option Strategies - BEAR

Feb. 2012

Here, we explore Selling SHORT a Stock or Index vs. Buying a PUT Option Spread on the Stock or Index….

A. In this example, if we consider Shorting 100 Shares of NASDAQ 100 at a Price of $62.5 , we will have to put up $ 6250

1). If we set a Target Price of $58 , we will earn a Profit of $550…

2). This would be a % Return on our Amount Invested of 7 %

3). If the Stock Rises 10% in Price, our Loss would be $-625

OR...B. In this example, if we consider Buying a PUT Option Spread , we will have to put up $ 15

1). If we set a Target Price of $58 , we will earn a Profit of $85…

2). This would be a % Return on our Amount Invested of 567 %

3). If the Stock Rises 10% in Price, our Loss would be $-15

Here are the Details :

C. If we SHORT the Stock . . .

Stock:

Symbol:

Price:

$ Amount Required per 100 Shares: ( 1 )

Target Price:

Target Price $ Profit:

Target Price as % Return on Amount Invested:

Loss if Stock Rises 10%:

( 1 ) - There is a Margin Requirement when you Short a Stock. Margin Requirements differ from Stock to Stock, however, there is a Federal Requirement that often equals 50% of the Amount Received from the Short Sale of the Stock. However, we use 100% for all the Stocks in our Examples, but you would need to check with your Broker to determine the amount you will be required to post.

NASDAQ 100

QQQ

$62.50

$6,250

58.00

$ 550

($625)

D. If we Buy the PUT Option Spread . . .

Buy This Option as Part of the Option Spread . . .

Buy / Sell:

Expire Date:

Strike Price:

Put / Call:

Option Price:

$ Amt. Paid for Option:

Option Symbol:

}

Net $ Amount Invested:

Target Price:

Target Price $ Profit:

Less - Net $ Amt. Invested:

Net $ Profit:

Net Profit % Return on Amt Invested:

Max Loss:

Max Profit:

Buy

4/21/2012

Put

$0.79

$79

QQQ120421P58

Sell This Option as Part of the Option Spread . . .

$15

$58

$100

($15)

$85

567%

($15)

$85

Buy / Sell:

Expire Date:

Strike Price:

Put / Call:

Option Price:

$ Amt. Rcv. for Option:

Option Symbol:

Sell

4/21/2012

Put

$0.64

$64

QQQ120421P57

E. Comparison Summary - SHORTING the Stock vs Buying a PUT Option Spread on the Stock….

# of Shares:

Price of Stock:

$ Amount Invested:

Target Price:

Target Price Net Profit:

Net Profit % Return on Amt Invested:

Loss if Stocks Rises 10%:

No. of Days Option Spread is in Force:

1). SHORTING The Stock -->

100

$62.50

$6,250

$58

$ 550

($625)

Unlimited

2). Buying the PUT Spread -->

100

$62.50

$15

$58

$ 85

567%

($15)

F. Conclusion :

1). Buying a PUT Spread on the Stock instead of SHORTING the Stock itself, will cost $6165 LESS in $ Amount Invested.

2). Buying a PUT Spread on the Stock instead of SHORTING the Stock itself, could result in a 567 % Return vs a 7 % Return on your $ Amount Invested, if the Target Price is reached.

3). Buying a PUT Spread on the Stock instead of SHORTING the Stock itself, could result in a Max Loss of $ -15 vs a Loss of $-625 if the Stock RISES 10% in Price.

4). Buying a PUT Spread on the Stock instead of SHORTING the Stock itself, could result in a Max Loss of $ -15 if the Stock does NOT reach the Targe Price by 4/21/2012

G. Profit & Loss Summary :

Here is what you can Earn in Profits or suffer in Losses as the Stock moves UP, DOWN or SIDEWAYS between now and the Expiration of the Option Spread. . .

1). If this Stock stays at the same price over the next 72 Days, you will have a Total Net Loss of $ -15

2). The Breakeven Price of this Stock is $ 57.85 which means the Price needs to go BELOW that Price before you will earn a Profit

3). The Price of this Stock needs to get to $ 57 or Lower to earn the Max Profit. No matter how much Lower the Price goes, you will only earn the Max Profit.

4). The Price of this Stock could rise all the way to $ 1000 and the Max Loss on this Put Option Spread would be $ -15

5). Since the Put Option Spread can be Sold at anytime prior to Expiration, when the Stock Price gets to any of the Prices shown below before Expiration, you can elect to Sell the Spread.

The Profit & Loss Summary for this Put Option Spread :

Rate of Return :

$85.50

And Higher

($15)

This would be a Minus 100 % Return on the Original Investment of $ 15

Max Loss =

Current Price

$62.50

= Current Price

($8)

Average Loss =

$57.85

= Breakeven Price

$43

Average Profit =

$58.00

And Lower

This would be a Rate of Return of 567 % Return on the Original Investment of $ 15

Stock Price

$85

Max Profit =

From Current Price to - $ 0

Today

04/21/12

This Option Spread can be sold at anytime during this Period to Book a Profit or Loss.

Important Notes :

1. All figures do not include commissions. The commission on Shorting 100 shares of stock should be around $8 - $10. The commission on buying an Option Spread should total around $8 to $14.

2. When you Short a Stock, the Profit potential is theoretically unlimited, down to a Zero Price. When you Buy an Option Spread, the Profit potential is limited to the difference between the Strike Prices of the Option you Buy and the Option you Sell…LESS the Net Amount Paid for the Option Spread.

3. When you Buy an Option Spread, there is an Expiration Date when the Spread expires. If the Price of the Stock does NOT FALL below the Strike Price of the Option you Buy by the Expiration Date, then you will not make a profit and will lose the Net $ Amount you paid for the Option Spread.

4. Regardless of how much the Stock Rises in Price, the Max Loss you will be exposed to is the Net Price you paid for the Option Spread. If you Short the Stock, however, you will be exposed to a loss equal to the Rise in Price of the Stock.

5. 1 (One) Option is equal to 100 shares of the Stock or Index.

6. The Price of an Option is multiplied by 100 to arrive at the $ Amount you will Pay or Receive for the Option. If you sell an Option, you will be credited with the Option Price times 100.

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