Option FanaticOptions, stock, futures, and system trading, backtesting, money management, and much more!

Investing in T-bills (Part 4)

I discussed put selling (also known as “short puts” or “naked puts”) last time as a way to participate in underlying stock appreciation in combination with T-bill investing. Before moving forward, I want to tie up some loose ends and present a different way of visualizing previous concepts.

Risk graphs are a way of visualizing potential risk and reward of option positions. I compared and contrasted such details for long calls and short puts in Part 3.

Here is the risk graph for a long call:

Here is the risk graph for a short put:

Buying calls depletes whereas selling puts raises cash that may be used to invest in T-bills. If the calls become profitable, however, then selling them will increase cash balance whereas closing a short put (or letting it expire) after the underlying stock has decreased can lower cash balance (more on this later).

I will continue next time.

* — The call is more expensive than the put because it includes over $2.00 intrinsic value. This is touched upon in
       the third paragraph here, but I would refer you to an introductory book/article on options for a more complete
       explanation. For at-the-money equity options, puts [premium] are generally more expensive than calls.
** — One naked put carries less risk than 100 shares of stock because its maximal loss is offset by the premium
         received for selling it. This is discussed in further depth here.