Abstract: Describe the reasons of trading short put stock options of Xiaomi, and share the advantages and disadvantages of this strategy.
Today I am sharing with you about the transaction I made on June 20, 2021, the detail is as follows:
- Short put
- Xiaomi Corp (HK stock code: 1810)
- 1000 units of stock option
- Expiration: 2021-07-29
- Strike price: HK$26
- Stock price at transaction: HK$27.2
- Option price: HK$0.39
- Commission fee: HK$19
- Premium received: HK$371
The reason why I did short put of Xiaomi
The short put option that I made in early June was expired yesterday (June 29), regarding the previous trading record on Xiaomi you may see here in detail. This time, I intend to use the same option strategy to see if I can buy the Xiaomi stocks at low price. Since Xiaomi has dropped a bit these days, I like to use a lower strike price of HK$26 this time. By taking into account the received premium, the cost of buying the stock will be HK$25.6 if the strike price is reached.
I have been the stockholder of Xiaomi, but it does not account for a great portion in my portfolio. You may see my portfolio here in detail if you are interested. Recently, I have been considering buying more Xiaomi stocks at this price level. I think one of the benefits of buying stocks with short put is that you can set an ideal buying price, which can help you avoid irrational transactions, such as chasing high prices or getting rid of buying because of fears when price drop. This strategy can really hone your patience and discipline in investing.
Correct mentality of trading short put
I have been repeating this over many times, but I think it really needs to be stressed out again and again. When you do short put, you should be prepared for buying the stocks. If instead you are not willing to buy the stocks but rather close the option when the stock price falls, you really should not do short put; in this situation, what you should do is long call, that is you bet the stock will rise, if its price turns out to fall, just sell the call option to realize the loss.
Risk return rate on option premium
This time, the short put I did is more out of the money (OTM), because there is no strike price of HK$26.5 for Xiaomi short put. So I was considering whether I should do strike price of HK$27 with option premium HK$0.78 or strike price of HK$26 with option premium HK$0.39, the option premium return of the former one is about 2.9% while the latter one is just 1.5%. At last I decided to choose the strike price of HK$26, it is because the purpose of trading short put here is for buying Xiaomi stocks at a lower price rather than earning option premium. In addition, earning 1.5% option premium in just one month in my opinion is already not bad as a bonus, but I’d rather like I can finally buy Xiaomi stocks at HK$25.6.
Comments and sharing
I am going to finish it here. If you have any questions, please feel free to leave a message or comment below, I will reply you. Or if you find anything incorrect in the article, please let me know and learn from you. If you find it interesting or it may help you in any sense, please share with other people.