A selected technique in choices buying and selling entails promoting a put choice whereas concurrently holding a brief place within the underlying asset. This contrasts with a unadorned put, the place the vendor doesn’t possess the underlying asset. If the choice is exercised, the vendor is obligated to buy the asset on the strike value. For instance, an investor would possibly promote an choice obligating them to purchase 100 shares of a specific inventory at $50 per share whereas already holding a brief place of 100 shares of that inventory.
The rationale behind this technique facilities on producing earnings and probably buying the asset at a desired value level. The premium acquired from promoting the choice offers rapid revenue. Furthermore, if the market value of the underlying asset falls beneath the strike value, the investor is obligated to purchase the asset, successfully overlaying their quick place. This limits potential losses and permits for closing the quick place at a positive value.