Consider the example for the put selling strategy; let's assume the Eth spot price is at $3000 and sell the 2700CE option. Let's check the possible scenarios for the strategy
Strategy setup -
Sell 2700PE and receive $300 as a premium and always remember that it's a far OTM call option.
After we initiate the trade, the market can move in any direction and expire at any level. Therefore let us take up a few scenarios to get a sense of what would happen to the put selling strategy for different levels of expiry.
The value of the put options would depend upon their intrinsic value. The intrinsic value of a put option upon expiry is –
Max [0, Strike - Spot] => Max[0, 2700-3100] = 0
The 2700PE option has 0 intrinsic value, but since we have sold/written this option, we get to retain the premium of $300.
Put selling strategy payoff would be: $300
So the maths will look like this-
Max [0, 2700-2700] = 0
The result would be the same as above. We(Seller) get to retain the premium of $300.
Put selling strategy payoff would be: $300
We assumed the market to be moderately bullish, but the market comes out as aggressively bearish. In this case, the option seller of the put option will suffer a loss proportional to downward movement.
Maths will look like this -
Max[0, 2700-2300] = 400
Put selling strategy payoff would be: 300 - 400 = -$100.
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