Classic Put Option - To play the downward trend short or medium term.
1. Relevant scenario
2. Trading with technical analysis
An investment is all the more speculative and risky that the option is out of the money and/or that its expiry is close. The Call option provides with an optimal reactivity to play the rise of the underlying when it is slightly out of the money, in other words when its exercise price is slightly inferior to the underlying price. If the underlying price remains stable, the Put option depreciates as the probability to reach the exercise price diminishes : we say that the time value diminishes. The time value decay accelerates as the maturity approaches. It is thus recommanded to invest on options that have a life druation of at least 4 times the investment horizon.
Underlying price increase
Passing of time
Volatility increase
Technical analysis is the study of the past evolution of the underlying based on quotation charts mainly with the intent of predicting the trend : rise, fall or consolidation and the timing : supports, resistances, and patterns. The Put option is convenient to benefit from the impulsion within a downwards trend, notably after a support has been reached or after the confirmation of a resistance.