Writing Put Options on a Support Level

May 16 13:05 2019 Print This Article

As the following chart shows, the price of shares in George Weston Limited (WN) is down slightly from its recent high of $102.30, and it could stabilize at a support level of around $98.00.

This is close to the current level of its 34-day moving average (on April 29, 2019). Furthermore, we can see that the stock’s RSI 5 (Relative Strength Index over five trading sessions) is approaching the oversold level, while its stoch indicator 89 (the stochastic indicator over 89 trading sessions) is still showing upward momentum above 80.

An investor who is confident in the company’s fundamentals, who is not afraid to buy shares at about $98, and who believes that the stock still has growth potential in the medium to long term could profit from this situation by writing put options with a strike of $98. The puts would oblige the investor to buy 100 shares per put contract written, in exchange for which he would receive a premium to cover the assumed risk. Receiving this premium is nothing short of being paid to buy the shares if their closing price on expiry of the options is less than the $98 strike.

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Option Matters

OptionMatters.ca is a blog about the Canadian options market. OptionMatters focuses on sharing information and insights concerning the use of options in various market conditions. OptionMatters is part of the educational mandate of the Montréal Exchange to assist Canadian's in perfecting their risk management skills.

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