Forex Investment and Currency Trading

Buying a put option (long put)
As the buyer of a put option, you acquire the right, against payment of a premium, to sell a pre-agreed amount of a certain underlying asset at a pre-agreed price. You are, however, not required to exercise the option.

As the buyer of the put, you anticipate falling prices and/or increasing volatility of the underlying asset within the remaining term of the option.

Buying a put option (long put)
Profile of profit or loss on expiry date

• If the price of the underlying asset falls below the strike price, you as the holder of the put option can sell the underlying asset at a price which is above the prevailing market price. In this way, you make a profit or, if hedging, can offset a loss. The profit zone is reached once the price of the underlying asset falls below the break-even point, which is the strike price less the option price. The opportunity for profit is limited to the amount of the strike price less the option premium paid.
• If the price of the underlying asset is equal to or higher than the strike price, you incur a loss which is limited to the amount of the option price which you paid. In this case, the holder will not exercise the option as he can sell the underlying asset at a higher price on the market.

The lower the strike price, the lower the price to be paid for the put. At the same time, there is also less chance of the option reaching the profit zone during the term of the option.

A long put is a bear-market strategy: You, as the buyer of a put, wish to profit from a drop in the price of the underlying asset. In addition to this speculative purpose, long put positions may also be used to hedge existing positions in the underlying asset, or particular components of an investment portfolio, against price drops. It is likewise possible to hedge existing foreign currency positions against a drop in the exchange rate.

Writing a put option (short put)
As the writer (seller) of a put option, you assume the obligation, against receipt of a premium, to buy a pre-agreed amount of a certain underlying asset at a pre-agreed price in case the buyer exercises the option.

As the writer of the put, you anticipate that prices will remain flat or slightly rise, and/or that the volatility of the underlying asset will decrease, within the remaining term of the option.

Writing a put option (short put)
Profile of profit or loss on expiry date

• From your perspective as the option writer, the put option remains in the profit zone if the price of the underlying asset rises or if it remains close to the strike price. The profit is limited to the amount of the option price received.
• If the price of the underlying asset falls below the strike price, the profit to you as the option writer quickly diminishes. Once the market price falls below the strike price, exercising the option makes economic sense for the buyer, with the result that the seller is obliged to purchase the underlying assets at the higher strike price. If the price of the underlying asset falls by more than the differences between the strike price and the option price (premium) which you received, you as the option writer enter the loss zone. The risk of loss associated with a short put position is limited to the amount fo the strike price less the option premium received.

The lower the strike price, the less likely that the option will be exercised, but the lower the option premium which is received.

Short put strategies are particularly suitable for generating extra income during periods when markets are largely flat as well as for providing a hedge for the planned purchase of shares at a later point in time.

Summary
The four basic types of option positions are summarized in the following table according to their behavioral characteristics:

The four basic transactions may also be used as a basis for constructing more complex strategies which combine various option types (calls and puts), strike prices, and/or different expiry dates.