Put Option

There are basically only two types of options: call options and put options.

A put option gives the holder the right but not the obligation to sell a certain stock (underlying security) at a certain price (strike price) by a certain date (expiration date).

Example: Suppose you own 100 shares of The XYZ Zipper Company and it's trading at $40/share. If you believe the stock to be at risk of falling in the near term, you could purchase a put to give yourself some protection.

Let's suppose that you decide to purchase a put option expiring in one month at the $35 strike price for $1 (multiplied by 100 shares = $100). You now have the right, but not the obligation, to sell your stock for $35/share between now and expiration.

If the stock stays above $35/share, your put expires worthless and you keep your stock. If, however, the stock does take a dive, your purchase of the put guarantees that you will still be able to get out at the strike price of $35/share no matter how low the stock itself trades.

The above is an example of a protective put, a hedging strategy designed to protect your holdings from big declines. But there is no requirement that you own the underlying stock in order to purchase a put, and, in fact, most purchasers of puts don't own the stock.

Most buyers of puts are simply betting that a stock will fall in price because, all else being equal, when a stock tumbles, the value of its corresponding puts increase (see table below).



UNDERLYING STOCK  VALUE OF CALLS  VALUE OF PUTS 
Moves Higher Increases Decreases
Moves Lower Decreases Increases


The same is true with calls. Most traders who buy calls or puts aren't purchasing them with any intention of exercising them.

On the contrary, they're betting that the value of the individual option will increase in the near future (e.g. call buyers are betting the stock will go up and put buyers are betting that the stock will go down). They don't buy options to exercise them, but rather to sell them for a profit.










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key option trading resources graphic

>> The Complete Guide to Selling Puts (Best Put Selling Resource on the Web)



>> Constructing Multiple Lines of Defense Into Your Put Selling Trades (How to Safely Sell Options for High Yield Income in Any Market Environment)



Option Trading and Duration Series

Part 1 >> Best Durations When Buying or Selling Options (Updated Article)

Part 2 >> The Sweet Spot Expiration Date When Selling Options

Part 3 >> Pros and Cons of Selling Weekly Options



>> Comprehensive Guide to Selling Puts on Margin



Selling Puts and Earnings Series

>> Why Bear Markets Don't Matter When You Own a Great Business (Updated Article)

Part 1 >> Selling Puts Into Earnings

Part 2 >> How to Use Earnings to Manage and Repair a Short Put Trade

Part 3 >> Selling Puts and the Earnings Calendar (Weird but Important Tip)



Mastering the Psychology of the Stock Market Series

Part 1 >> Myth of Efficient Market Hypothesis

Part 2 >> Myth of Smart Money

Part 3 >> Psychology of Secular Bull and Bear Markets

Part 4 >> How to Know When a Stock Bubble is About to Pop