Skip to main content
Track Long put
9 / 22
Search the archiveLibrary
Library

2008issue C061-2

Ranking in-the-money puts by breakeven rather than cheapest premium

In January 2008 a GBP/USD downside view still allowed an interim bounce, so the procedure specified a long put rather than selling a forward. In-the-money candidates were ranked by breakeven, the one-month 2.0050 put was selected, and the position was closed after about seven days as spot reached the 1.95 zone and implied volatility eased.

  • An allowed bounce toward 1.98 to 1.99 ruled out selling a GBP/USD forward, so the directional vehicle was a long put whose maximum loss is the premium paid.
  • In-the-money strikes 2.0050 and 1.9800 were quoted for one-month and two-month tenors and ranked by breakeven, treating option-premium as a budgeted input rather than a cost to minimize.
  • The one-month 2.0050 put was chosen for the highest breakeven of 1.9584 even though the 1.9800 one-month and two-month premiums were lower.
  • By 11 January 2008 spot was at 1.9520 and implied volatility had eased from 9.85% to 9.08%. The put was closed after about seven days, and the same dates were used to compare entry premium and exit receipt on neighboring strikes.
Entries in this reading3 entries
Current trackLong put26 readingsOption premium analysis50 readingsImplied volatility analysis76 readings

A bounce still on the table

On 4 January 2008 GBP/USD was near 1.9690. The working one-month downside zone was near 1.95, and a longer three-to-four-month zone was near 1.90. An interim bounce toward 1.98 to 1.99 was still allowed for.

Because that interim bounce could not be dismissed, the procedure specified a long put rather than selling a GBP/USD forward. A long put is a purchased put used as the directional vehicle so an adverse bounce cannot force a short-forward loss. Maximum loss is the premium paid.

How the candidates were scored

The candidates were in-the-money strikes 2.0050 and 1.9800, set against a one-month at-the-money-forward rate of 1.9674 with spot at 1.9690. In-the-money means a put strike above the prevailing spot or forward, so the contract already carries intrinsic value. The at-the-money-forward strike is the moneyness reference when scoring those alternatives. Each strike was quoted for a one-month and a two-month tenor, with tenor treated as a design choice.

Quoted option-premium amounts, the upfront price of each put, were 0.0466 for the 2.0050 one-month, 0.0300 for the 1.9800 one-month, 0.0544 for the 2.0050 two-month, and 0.0390 for the 1.9800 two-month. The matching breakevens were 1.9584, 1.9500, 1.9506 and 1.9410. Breakeven is the underlying level at which the put payoff offsets the premium paid. It was used here as the ranking metric across candidate contracts. Option-premium was compared across strikes and tenors as a budgeted input, not as a quantity to minimize by default.

The selected put and the seven-day close

The selected contract was the one-month 2.0050 put, chosen for the highest breakeven (1.9584) even though its premium exceeded the 1.9800 one-month and two-month alternatives.

By 11 January 2008 GBP/USD had declined to 1.9520 and implied volatility had eased from 9.85% to 9.08%. Implied volatility is the volatility priced into the option. A later decline can shrink remaining premium even while a favorable spot move helps the long put. After about seven days the original 1.95 zone was treated as largely reached with limited time-value erosion, and the put was closed. Time-value is the portion of premium above intrinsic value that decays as expiration approaches. A fast approach to the target reduces how much of it is lost.

Same-date comparison across strikes

The same review marked other strikes on identical dates, 1.9800, 2.0250 and 2.0300 alongside 2.0050, so entry premium and exit receipt could be compared across contracts instead of ranking solely by the lowest initial cost.

In-the-money GBP/USD put breakevens by strike and tenor

The one-month 2.0050 put posted the highest breakeven of the four published combinations, which is why it was bought instead of the cheaper 1.9800 strikes. Values are the breakeven row from the source strike-and-tenor table quoted on 4 January 2008.
The one-month 2.0050 put posted the highest breakeven of the four published combinations, which is why it was bought instead of the cheaper 1.9800 strikes. Values are the breakeven row from the source strike-and-tenor table quoted on 4 January 2008.GBP/USD · 1-month and 2-month

Both strikes were in-the-money versus the one-month at-the-money forward of 1.9674 (spot 1.9690). The selected 2.0050 one-month put cost 0.0466, more than either 1.9800 contract, but its 1.9584 breakeven was the highest of the set.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
9 of 22 in the Long put track
201222-33 pp.Next on Long putEvaluating long-put moneyness when implied volatility shiftsPercent-moneyness is the signed distance of a strike from spot as a percentage of spot: positive when in-the-money, zero when at-the-money, and negative when out-of-the-money.
All readings on this track · 22 readings
  1. 1984A long silver put as a prepaid loss cap
  2. 1984Spectral window gates for index long puts
  3. 1990Breadth nonconfirmation as the gate for a volume fade and long-put case
  4. 2002Volatility-first construction for a bearish put or debit
  5. 2002Name the regime and the season before choosing a long put
  6. 2005Critique of put spreads versus outright long puts
  7. 2007Sector put hedges, automatic exercise, and pin risk
  8. 2008Margin shock, defined-debit options, and selective premium
  9. 2008Ranking in-the-money puts by breakeven rather than cheapest premium
  10. 2012Evaluating long-put moneyness when implied volatility shifts
  11. 2012Sizing a long butterfly for early assignment and a long option for gamma
  12. 2013Gold after the April break: option-spread vehicles and a long-put hedge
  13. 2014A defined-risk option case for the mid-February to mid-July energy window
  14. 2014Long put versus vertical debit spread on a Treasury ETF
  15. 2015Defined debit call spread on a health-insurer worksheet
  16. 2015Overbought technology index: a long put via an inverse proxy
  17. 2018Replace futures stops with short-dated long puts
  18. 2018Constructing short-dated long puts around weekly expiration
  19. 2018Four decisions before a portfolio protective put
  20. 2018Incremental producer hedging with puts and risk reversals
  21. 2019Put butterfly versus long put in a volatility spike
  22. 2020Scenario-first SPY put hedge: butterfly versus long put
By fieldOptions and volatility193 readingsBy year200870 readings
All 26 readings tagged Long put
Also on Long put5 readings
2012Evaluating long-put moneyness when implied volatility shifts2018Constructing short-dated long puts around weekly expiration2002Name the regime and the season before choosing a long put2008Margin shock, defined-debit options, and selective premium2019Put butterfly versus long put in a volatility spike