What is put option?

What is put option?

Simply put (pun intended), a put option is a contract that gives the option buyer the right — but not the obligation — to sell a particular underlying security (e.g. a stock or ETF) at a predetermined price, known as the strike price or exercise price, within a specified window of time, or expiration.

How do option puts work?

A put option gives you the right, but not the obligation, to sell a stock at a specific price (known as the strike price) by a specific time – at the option’s expiration. For this right, the put buyer pays the seller a sum of money called a premium.

What is the downside of a put option?

The downside of a put option is that if the price of the underlying security moves in the opposite direction of where the investor anticipates it to go, there could be a substantial loss. Put options are one of two main types of options traded by investors.

When should you buy a put option?

Investors may buy put options when they are concerned that the stock market will fall. That’s because a put—which grants the right to sell an underlying asset at a fixed price through a predetermined time frame—will typically increase in value when the price of its underlying asset goes down.

How does a put option make money?

You make money with puts when the price of the option rises, or when you exercise the option to buy the stock at a price that’s below the strike price and then sell the stock in the open market, pocketing the difference. By buying a put option, you limit your risk of a loss to the premium that you paid for the put.

How does selling put options work?

When you sell a put option, you agree to buy a stock at an agreed-upon price. That’s because they must buy the stock at the strike price but can only sell it at a lower price. They make money if the stock price rises because the buyer won’t exercise the option. The put sellers pocket the fee.

What is the risk of selling a put option?

However, selling puts is basically the equivalent of a covered call. 14 When selling a put, remember the risk comes with the stock falling. In other words, the put seller receives the premium and is obligated to buy the stock if its price falls below the put’s strike price. It is the same in owning a covered call.

Is buying a put bullish or bearish?

Conversely, buying a put option gives the owner the right to sell the underlying security at the option exercise price. Thus, buying a call option is a bullish bet–the owner makes money when the security goes up. On the other hand, a put option is a bearish bet–the owner makes money when the security goes down.

How do you profit from a put option?

A put option buyer makes a profit if the price falls below the strike price before the expiration. The exact amount of profit depends on the difference between the stock price and the option strike price at expiration or when the option position is closed.

When to use a put option?

Put options are most commonly used in the stock market to protect against the decline of the price of a stock below a specified price.

When to sell a put option?

When selling put options, there are two rules to live by: Only sell puts on stocks you wouldn’t mind owning. Sell only as many contracts as you could be comfortable having exercised. The best time to write puts is when the underlying shares appear undervalued.

How is a put option exercised?

A put option is a contract that gives its holder the right to sell a set number of equity shares at a set price, called the strike price, before a certain expiration date. If the option is exercised, the writer of the option contract is obligated to purchase the shares from the option holder.

When is a put option exercised?

The time to exercise a put option is when the value of the underlying asset drops well below the strike price (the price at which it can be exercised) by the expiration date.