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Put Options - Page 1 of 2
Put options give the buyer the right, but not the obligation, to sell an underlying asset at the strike price until their broker’s cut-off time shortly after market close on the last trading day before expiration. Just like call options, put options come in various strike prices depending on the current market price of the underlying instrument as well as a variety of expiration dates. Expiration dates can vary from one month out to more than a year (LEAPS options). However, unlike call options, you might consider going long a put option if you expect market prices to fall (bearish). In contrast, if you are bullish (expect the market to rise), you might consider selling a put option.
If you choose to buy or go long a put option, you are purchasing the right to sell the underlying instrument at the chosen strike price until expiration. The premium of the long put option will show up as a debit in your trading account. This value is the maximum loss you risk by purchasing a put option. The maximum profit is limited to the downside since the underlying stock can only fall to zero. A profit can be made in one of two ways as the underlying market declines. If and when the underlying stock falls below the put strike price, you can exercise the put to short the shares at a higher price and then immediately buy the underlying stock at a cheaper price to cover the short and exit the trade (strike price - current price = profit). The second technique for profiting on a put comes from offsetting it. If the price of the underlying stock falls, the corresponding put premium increases and can then be sold at a profit. If you go long a put option and the underlying security (index or stock) increases in price, the value of the put will fall. Then you can either sell the put at a loss or let it expire worthless.
If you choose to sell or go short a put option, you are obligated to buy the underlying stock at a particular strike price.
The premium of the short put will show up as a credit in your trading account. In most cases, you are anticipating that the short put option will simply expire worthless on the expiration date so that you can keep the premium received. The premium amount is the maximum profit you can receive by selling a put option. If the underlying stock falls below the put strike price, the put will most likely be assigned. The option seller then has an obligation to buy the underlying stock (usually 100 shares per option) at the put strike price. You will then be long shares of the underlying stock and the loss incurred depends on how low the price of the underlying stock falls as you try to sell the shares to exit the position. Experienced traders who choose to go short put options do so in a stable or bull market because the put will not be exercised unless the market falls.
Put options give you the right to sell something at a specific price for a fixed amount of time. A put option is in-the-money (ITM) when the strike price is higher than the market price of the underlying asset. A put option is at-the-money (ATM) when the price of the underlying security is equal (or close) to its strike price. A put option is out-of-the-money (OTM) when the price of the underlying security is greater than the strike price.
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