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The majority of options expire worthless. As a result most buyers end up losing. So this begs the question..... who is making the money? The answer is "the option sellers".

PUTS: The option, but not the obligation, to sell a security at the strike price during the option period.

Put buyers purchase the Put on the expectation of a fall in price of the underlying security. As the price of the underlying security
falls, the value of the Put increases. This is because the owner (buyer) of the put can exercise the option and "PUT" (Sell) the underlying security at a price that is higher than the current market price. On the other side of the transaction is the Put seller. The seller of the Put is hoping that the underlying security's price remains the same or increases. As the value of the underlying security increases, the value of the Put falls. The seller therefore can keep the premium received at expiration, or he/she may decide to buy back the contract at a much lower price thereby creating a profit.

The concept, although a bit obscure to most investors, is really quite simple. Imagine you sold your car to someone for $ 10,000.00.
Now suppose the owner of the car needed funds and offered you the car back for $ 8,000.00. If you agree to buy the car at $ 8,000.00, then you are left with a $ 2,000.00 profit on the transaction.

Selling and repurchasing Puts work in the exact same way.

As most Puts expire worthless, we prefer to sell Puts on stocks that we would be willing to own in case we are eventually "put". The decision to hold long or short term Puts rests on our long term expectation of the underlying security.

We also will from time to time sell covered calls. But we much prefer to buy long term calls known as LEAPS that are usually at
least one year out and in some cases two years out. We hold these on the expectation of growth of the underlying security. Another reason to use LEAPS is that our capital can be used in smaller amounts while at the same time benefiting from the success of the underlying business.

Our option positions are readily available to see in our LTP Portfolio

Contact Long Term Partners    longterm@longtermpartners.com

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