Buying Platinum Put Options to Profit from a Fall in Platinum Prices

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Contents

Buying Platinum Put Options to Profit from a Fall in Platinum Prices

If you are bearish on platinum, you can profit from a fall in platinum price by buying (going long) platinum put options.

Example: Long Platinum Put Option

You observed that the near-month NYMEX Platinum futures contract is trading at the price of USD 964.00 per troy ounce. A NYMEX Platinum put option with the same expiration month and a nearby strike price of USD 960.00 is being priced at USD 64.27/oz. Since each underlying NYMEX Platinum futures contract represents 50 troy ounces of platinum, the premium you need to pay to own the put option is USD 3,214.

Assuming that by option expiration day, the price of the underlying platinum futures has fallen by 15% and is now trading at USD 819.40 per troy ounce. At this price, your put option is now in the money.

Gain from Put Option Exercise

By exercising your put option now, you get to assume a short position in the underlying platinum futures at the strike price of USD 960.00. In other words, it also means that you get to sell 50 troy ounces of platinum at USD 960.00/oz on delivery day.

To take profit, you enter an offsetting long futures position in one contract of the underlying platinum futures at the market price of USD 819.40 per troy ounce, resulting in a gain of USD 140.60/oz. Since each NYMEX Platinum put option covers 50 troy ounces of platinum, gain from the long put position is USD 7,030. Deducting the initial premium of USD 3,214 you paid to purchase the put option, your net profit from the long put strategy will come to USD 3,817.

Long Platinum Put Option Strategy
Gain from Option Exercise = (Option Strike Price – Market Price of Underlying Futures) x Contract Size
= (USD 960.00/oz – USD 819.40/oz) x 50 oz
= USD 7,030
Investment = Initial Premium Paid
= USD 3,214
Net Profit = Gain from Option Exercise – Investment
= USD 7,030 – USD 3,214
= USD 3,817
Return on Investment = 119%

Sell-to-Close Put Option

In practice, there is often no need to exercise the put option to realise the profit. You can close out the position by selling the put option in the options market via a sell-to-close transaction. Proceeds from the option sale will also include any remaining time value if there is still some time left before the option expires.

In the example above, since the sale is performed on option expiration day, there is virtually no time value left. The amount you will receive from the platinum option sale will be equal to it’s intrinsic value.

Learn More About Platinum Futures & Options Trading

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Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

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Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Buying Platinum Call Options to Profit from a Rise in Platinum Prices

If you are bullish on platinum, you can profit from a rise in platinum price by buying (going long) platinum call options.

Example: Long Platinum Call Option

You observed that the near-month NYMEX Platinum futures contract is trading at the price of USD 964.00 per troy ounce. A NYMEX Platinum call option with the same expiration month and a nearby strike price of USD 960.00 is being priced at USD 64.27/oz. Since each underlying NYMEX Platinum futures contract represents 50 troy ounces of platinum, the premium you need to pay to own the call option is USD 3,214.

Assuming that by option expiration day, the price of the underlying platinum futures has risen by 15% and is now trading at USD 1,109 per troy ounce. At this price, your call option is now in the money.

Gain from Call Option Exercise

By exercising your call option now, you get to assume a long position in the underlying platinum futures at the strike price of USD 960.00. This means that you get to buy the underlying platinum at only USD 960.00/oz on delivery day.

To take profit, you enter an offsetting short futures position in one contract of the underlying platinum futures at the market price of USD 1,109 per troy ounce, resulting in a gain of USD 149.00/oz. Since each NYMEX Platinum call option covers 50 troy ounces of platinum, gain from the long call position is USD 7,450. Deducting the initial premium of USD 3,214 you paid to buy the call option, your net profit from the long call strategy will come to USD 4,237.

Long Platinum Call Option Strategy
Gain from Option Exercise = (Market Price of Underlying Futures – Option Strike Price) x Contract Size
= (USD 1,109/oz – USD 960.00/oz) x 50 oz
= USD 7,450
Investment = Initial Premium Paid
= USD 3,214
Net Profit = Gain from Option Exercise – Investment
= USD 7,450 – USD 3,214
= USD 4,237
Return on Investment = 132%

Sell-to-Close Call Option

In practice, there is often no need to exercise the call option to realise the profit. You can close out the position by selling the call option in the options market via a sell-to-close transaction. Proceeds from the option sale will also include any remaining time value if there is still some time left before the option expires.

In the example above, since the sale is performed on option expiration day, there is virtually no time value left. The amount you will receive from the platinum option sale will be equal to it’s intrinsic value.

Learn More About Platinum Futures & Options Trading

You May Also Like

Continue Reading.

Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Buying Platinum Put Options to Profit from a Fall in Platinum Prices

When it comes to options trading, it starts with puts and calls. The long put option has similar characteristics as a short stock position.

More specifically, it’s a contract that provides the buyer (of the option) the right to sell a designated quantity of shares at an agreed price and by a specified date.

What is a put option? A put option:

  • is a contract that gives the holder the right to sell an underlying security, such as a stock, at a pre-determined price, which is called the strike price,
  • must be executed within a specified time frame, and
  • does not oblige the owner to sell, but rather gives her the right to decide to do so during the contract period.

Conversely, a call option is a contract that gives the holder the right to purchase the underlying security.

Think of Put Options like buying insurance for your iPhone. It costs you a premium to protect your phone.

However, if the phone breaks, you’ll be covered. On the other hand, if you are not “hedged” then you could end up spending a lot more to get a new phone if it breaks.

It’s all about risk vs. reward. That said, when you buy a put option, or put options, it’s considered a bearish strategy.

That is, you’ll profit if the underlying stock drops in price. However, if you buy a put option and you are holding the underlying stock, it’s considered a hedge.

What is a Long Put Option?

If you’re bearish on an underlying asset, you might consider a long put option. A long put means buying a put option to make a bet that the underlying asset will fall. An investor could also use a long put to hedge a long position by offsetting the potential loss in an underlying asset.

Analyzing A Long Put Option

On January 24, Canada Goose (GOOS), got downgraded by Wells Fargo, citing that risk/reward was no longer compelling.

Shares closed lower 7.25% after the morning downgrade.

Now, let’s assume you agree with the research and feel that Canada Goose will take some heat and sell off more. So, you pull up an options chain and take a look at the Feb options, expiring in 22 days from now.

The put options are on the right. If you look up, you’ll see that shares of the stock closed near $46. That said, the $46 puts, expiring are going for about $4 in option premium (the bid/ask spread is $3.80 by $4.10).

Now, what does that mean?

Analyzing Break-Even On a Long Put Option Trade

If you buy the $46 put options, you are spending $400. Every option contract represents 100 shares ($4 x 100).

According to this position, you’ll make money if GOOS shares decline below $46 between now and expiration which is 22 days away.

However, since you are spending $4 in premium, you need to make up for that cost to break-even.

To get your break-even point, take $46 and subtract it by $4, and you get $42. In other words, You’ll need the stock to decline about 8.7% to break-even, between now and the Feb 15 expiration.

Does The Stock Always Need To Get To The Strike Price?

It is a tricky question to answer.

Let’s assume you bought $46 puts today at $4, and tomorrow the stock drops 2 points and is trading at $44, you’ll be profitable on the trade. However, if it stays at $44 at expiration, the option would be worth $2, and since you spent $4 on it, it would be a $2 loser.

Not only that, since this option expires in-the-money, you’ll be assigned the stock short the following trading day.

That’s right, and if you are long a put option that is at least one penny in-the-money, then it will be exercised.

However, let’s say you don’t have the funds to convert options into stock, typically your broker will send you an email or message alerting you. If you don’t act, they’ll usually get you out of the position. They do this to protect themselves and you.

Of course, you’re never locked into a long option trade, puts or calls. You can always close out for a profit, loss, or break-even.

When Should You Buy A Put Option

That said, two of the most critical factors that influence an options price, is time and volatility. Keeping all things equal, the farther out you go out it in time, the more expensive options are. Furthermore, the higher the options volatility, the more expensive options are.

So what causes option volatility to spike?

It’s all about supply and demand. For example, let’s say share prices are crashing because it got attacked by a short-seller report. If you are long the stock, you might buy puts to hedge the position.

Most likely, a lot of longs will too. You see, it takes time to verify the report. If it turns out to be true, the stock could decline even more.

That said, traders are scrambling to buy puts, driving the price higher. Of course, speculators are buying puts to profit off from its price decline, adding fuel to the fire.

For example, let’s assume that Wayfair (W) is trading at $100 per share. Check out the price of the $100 put options with 120 days till expiration, and at different volatility levels.

  • 15% implied volatility, options priced at $3.28.
  • 30% implied volatility, options priced at $6.72
  • 60% implied volatility, options priced at $13.56

Don’t Make This Mistake

See, this is why a lot of rookie options traders lose. They fail to take into account the volatility factor. Just because you buy puts and the stock drops, it doesn’t always mean instant profits.

Sorry, that’s not how this works.

That said, when you buy a long put option, you also capitalize on implied volatility spikes. On the other hand, a decline in volatility will hurt a long put option position.

For example, during earnings, options implied volatility would elevate because of the uncertainty.

However, after the company announces, the risk is gone. At that point, the market players try to decide whether the information is bullish or bearish for the company.

There are ways around it, like buying spreads, a slightly more advanced strategy that I’ll teach later.

The best way you can tell if options are expensive or not is to compare it to the past. For example, on January 24, Tesla (TSLA) options had an implied volatility (30-day average) of 71.6%

Now, is that a lot?

It’s 52-week low implied volatility is 35.1% and its high is 86.9%. Further, its 71.6% implied volatility is at the 93rd percentile. This information is found in most brokerage platforms.

Put Options Trading – Our Final Thoughts…

Buying put options allow you to make money when stocks are dropping. Also, they can be used to hedge your portfolio.

For example, if you think the market looks weak, you could try to buy SPY, DIA, QQQ, or IWM puts.

These options are very liquid and offer a competitive bid/ask spread. You’ll want to pay attention to implied volatility if you pay up too much, its a more significant hurdle to overcome.

On the other hand, any spikes in implied volatility will make long puts jump in value. Now, if you want to learn more about how to buy put options, and how you can become a better trader, check out my eBook.

One of the best traders anywhere, over the past 20 years Jeff’s made multi-millions trading stocks, ETFs, and options. He is renowned as an incredible trader with a deep insight and a sensitive pulse on the markets and the economy. Jeff Bishop is CEO and Co-Founder of RagingBull.com.

Even greater than his prowess as a trader is his skill and passion in teaching others how to trade and rake in profits while managing risk.

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  • Binomo
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    Good Choice For Experienced Traders! 2nd place in the ranking!

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