A put-write, also known as selling a naked put option, is an options strategy where an investor sells a put option contract, obligating them to purchase the underlying asset at a specified strike price if the market price falls below that level before or on expiration. The primary purpose is to generate income from the premium received, often used by investors who are bullish or neutral on the underlying asset and willing to acquire it at a lower price.
Mechanism
The mechanism involves the seller receiving a premium upfront from the buyer of the put option. If the underlying asset’s price remains above the strike price until expiration, the option expires worthless, and the seller retains the entire premium as profit. However, if the price drops below the strike, the put option is “in the money,” and the seller is obligated to buy the asset at the strike price. This exposes the seller to potential losses if the asset’s price continues to decline significantly.
Methodology
The strategic approach to a put-write is a short-volatility, income-generating tactic, often employed when an investor anticipates limited downside or a rebound in the underlying asset’s price. This methodology requires a robust understanding of implied volatility and risk management, as unlimited downside risk exists if the asset’s price collapses. In crypto institutional options trading, put-writes can be used to generate yield on stablecoins or other assets, or as a means to acquire a target cryptocurrency at a discount, provided the risk of significant price depreciation is carefully assessed and managed.
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