Stock Market Trading:
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 percent).
- If the stock goes to $45 your put expires worthless,
you lose your premium and put seller keep the premium.
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