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Watch full video ↗The speaker is selling a put on Apple stock at the 245 strike price, expecting the stock to remain above that level. The risk is limited to the difference between the strike price and the stock price, with the potential reward being the premium collected. The trade is part of a broader strategy of selling puts across multiple assets to diversify risk.
The trader is considering selling a put option on a stock, which involves receiving a premium for the right to sell the stock at a specific price. The decision hinges on whether the premium is sufficient to justify the risk, with the trader acknowledging that this is a personal judgment. The trade is seen as a way to generate income, similar to an insurance company's model, but with the risk of potential losses if the stock price moves against the trader's position.
The price of an option (like a put) represents the market's assessment of the risk of a price drop. The more risk involved (e.g., a larger potential drop), the cheaper the insurance (option price). This is analogous to home insurance, where higher-value properties require more expensive coverage. The market prices options based on the probability of the underlying event occurring, with the insurance provider (option seller) profiting from the premium unless the event happens.
The speaker compares selling options to acting as an insurance company, taking on the risk that other traders do not want. This involves selling puts to collect premiums, with the risk being the potential obligation to buy the underlying asset if it falls below the strike price. The key is to manage risk by spreading it across multiple assets and strike prices, similar to how insurance companies diversify their risk across many policies.
Options are likened to insurance, where traders pay a premium for the right to buy or sell an asset at a specific price. The market assigns a price to this insurance based on perceived risk, including factors like probability of an event and profit margins. This perspective emphasizes that options are not just random numbers but reflect the market's assessment of risk and potential outcomes.
The insurance company typically makes more money, as the premium is paid by the policyholder, and the insurance company only pays out when the insured event occurs, which is rare.
TakeawayInsurance premiums are structured to ensure the provider profits in the long run, as the likelihood of the insured event is low.
The speaker acknowledges that selling a put at the 245 strike price could result in a maximum loss of $24,000 if the stock price drops to zero. However, they suggest mitigating this risk by using a vertical spread, such as buying the 240 put and selling the 245 put, which reduces the risk to $444.
TakeawaySelling a put at the 245 strike price on Apple stock carries a significant risk of a $24,000 loss if the stock price drops to zero. To mitigate this, the speaker suggests using a vertical spread to reduce the risk.
The speaker acknowledges that the decision to sell the 245 put is a personal judgment. The trader must evaluate whether the premium received is sufficient to justify the risk, considering the potential for loss if the stock price moves against the position. The speaker emphasizes that there is no right or wrong answer to this decision.
TakeawayTraders should assess whether the premium received is adequate for the risk involved in selling a put option.