Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 296

was the original investment, therefore the $2,000 net profit works out to a 40% return. Again this is just an arbitrary approach I am using here to make a point. It is not a standard measure of return on shorts. But what about potential losses? Based on what we learned about shorting stocks previously, if the stock rises rather than falls (as you had hoped for) your losses could, theoretically, be infinite. Of course there comes a point that most short traders would cut their losses and close their short position or they would be forced to close by their broker. So short of shorting what other option is available to you to cash in on your hunch that a certain stock is poised to decline but also limit your losses if the stock doesn't decline, or worse rises?

Enter put options. To illustrate how put options work, let's get back into our example. Ford is trading at $50, you are expecting it to devalue soon so you decide to buy some put options on Ford. A quick check with your broker would reveal the put options available on Ford. If we are at the beginning of January, the following January options, with let's say 20 days to go, might be among the available choices:

Sample Ford Put Options

Symbol Price (Premium) Strike Price
FMH
$1/8
$40
FMI
$1/2
$45
FMJ
$2
$50
FMK
$6 1/2
$55
FML
$11
$60

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Table of Contents
Copyright and Disclaimer
Book Chapters
Table of Contents Copyright and Disclaimer Foreword Money
Bonds Futures Stocks Options
Mutual Funds Retirement Final Words Appendix A

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