How to Exit Options For Maximum Profits

. And when looking for a well-priced speculative move, time to expiration coupled with the gap between current market value and striking price—which dictates the amount of time value premium—will help you to find real bargains in puts. Premium level is not a reasonable criterion for your selection.

The profit and loss zones for puts are the reverse of the zones for call buyers, because put owners anticipate a downward movement in the stock, whereas call buyers expect upward price movement.

Example: Canceling Out the Losses: You buy a put with a striking price of 50, paying 3. Your break even price is $47 per share. If the underlying stock falls to that level, the option will have intrinsic value of 3 points, equal to the price you paid for the put. If the price of stock goes below $47 per share, the put will be profitable point-for-point with downward price movement in the stock. Your put can be sold when the underlying stock's market value is between $47 and $50 per share, for a limited loss. And if the price of the stock rises above $50 per share, the put will be worthless at expiration.

Before buying any put, determine the profit and loss zones and breakeven price (including the cost of trading on both sides of the transaction). For the amount of money you will be putting at risk, how much price movement will be required to produce a profit? How much time remains until expiration? Is the risk a reasonable one?

Remember this rule: As a buyer, don't depend on time value to produce profits between purchase date and expiration, because that is highly unlikely to occur. If you do not experience a price decline in the stock's price adequate to exceed the price you paid for the put, then you will have a loss. Like call purchasing, time works against you when you buy puts. The greater the gap between market price of the stock and striking price, the more time problem you will have to overcome.

The mistake made by many investors is failing to recognize what is required to produce a profit, and failing to analyze a situation to determine whether buying puts makes sense. Analyze these points in evaluating put buying:

·Your motive (leverage, reduction of risk, or downside protection).
·The premium level and amount of time value premium.
·Time remaining until expiration.
·Gap between the stock's current market value and the put's striking price.
·The number of points of movement in the underlying stock required before you can begin earning a profit.
·The characteristics of the underlying stock

Collectively, these guidelines define an investment strategy and work for you as tools for evaluating risks and identifying profit potential. You could earn substantial short-term profits; you also face a corresponding high risk level represented by time, the buyer's enemy.

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