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Put
Options.
Put options give you the right to sell something at a
specific price for a fixed amount of time.
The trader can buy puts when he
(she) believe that stock or index will fall in price. The one who
bought a put has the right, but not the obligation, to sell the
underlying stock at the strike price of the option until the expiration
date. If a trader buys a put option, the risk of the trade equals the
money paid for the option. If the price of the stock or index moves
lower the put buyer can get profit.
You have three options if you own a put:
- You can let the option
expire worthless.
- You can exercise your right to short the market.
- You can sell put options.
The put seller or a writer has the obligation of
buying an underlying security from the put buyer for a strike price
until the expiration date.
Example:
Current stock price is $40 and you
might buy a put to sell the stock to the put writer at the strike price
$36 for three month for $1.
- If the stock declines to $30 you exercise the
option and demand that the put seller buy your stock at $36 (you can
buy it at $30 in the stock market). You keep the difference that is
your profit. In this case by investing $1 you are making $6 (600%).
- If the stock goes to $45 your put expires
worthless, you lose your premium and put seller keep the premium.
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