Put OptionThere are basically only two types of options—calls and puts. 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).
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’ll 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 will increase (see table below).
The same is true with calls. Most traders who simply 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. They buy options for the sole purpose of (hopefully) selling them for a profit. NEXT PAGE: Long Options Return from Put Option to Options Trading Education Return to Great Option Trading Strategies Home Page
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