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Buying And Selling Puts – “Put” Up Or Shut Up

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 Introduction

 

 

In the previous lesson, we have gone over the basics of put options and how they work. It is at this time that we will begin to teach you about put options – the other choice that option traders and investors use. But not to worry, trading puts is eerily similar to trading calls, so there is nothing to fear.

In this lesson, you’ll learn the basics of buying and selling puts, as well as how to identify puts on an option table using intrinsic and extrinsic values.

 

But before we begin, we would like you to read and agree to the Terms & Conditions of this post before you proceed any further.

Disclaimer: Invest In Wall Street is in no way financially or legally responsible for any investing decisions made by any of our readers and are, in turn, acting on their own free will. The information in this article is purely educational and should not be abused or misconstrued in any way, shape, or form.

 

Buying And Selling Puts: “Put” Up Or Shut Up

 

 

Just like with calls, the price at which the underlying stock will be sold is the strike price. Expirations are the same as
calls as well.

Just like call options, you’ll buy at the ask and sell at the bid price.

Buying to open a position by purchasing at the ask price, means you’re opening a long position. Remember to “long” something, means to own it. To close this position you’d sell at the bid.

Selling to open a position by selling at the bid price, means you’re opening a short position. To close the short position, you’d buy it back at the ask price.

Going back to the option table, you may have also noticed that the “in the money” options have higher strike prices – as this is the opposite of call options.

 

 

You should remember that “in the money” options have intrinsic value as part of their premium.

Remember at expiration, the intrinsic value will be the value of the option. Intrinsic value represents the portion of the option premium made up of the stock price.

The remainder of the option premium is made up of extrinsic value. “Out of the money” options are made up entirely of extrinsic value.

Just like call options, the extrinsic value consists of time value and implied volatility. The time value in a long put position will melt just like it did with call options.

Implied volatility will also work the same way as it did with calls. However, because implied volatility usually surges when the underlying securities price surges, it can actually be helpful in a put’s overall return.

 

 

The “at the money” option is still the option with a strike price closest to the stock price, and may or may not have intrinsic value.

In this lesson, you learned how to buy and sell puts on an option table. You also learned how to identify “in the money” and “out of the money” options by their intrinsic and extrinsic values.

 

Quick Recap

In Review….

Buying & Selling Put Options

 

  • Just like with calls, the price at which the underlying stock will be sold is the strike price. Expirations are the same as calls as well
  • Just like call options, you’ll buy at the ask and sell at the bid price
  • Buying to open a position by purchasing at the ask price, means you’re opening a long position. Remember to “long” something, means to own it. To close this position you’d sell at the bid
  • Selling to open a position by selling at the bid price, means you’re opening a short position. To close the short position, you’d buy it back at the ask price
  • Going back to the option table, you may have also noticed that the “in the money” options have higher strike prices – as this is the opposite of call options
  • You should remember that “in the money” options have intrinsic value as part of their premium
  • Remember at expiration, the intrinsic value will be the value of the option. Intrinsic value represents the portion of the option premium made up of the stock price
  • The remainder of the option premium is made up of extrinsic value. “Out of the money” options are made up entirely of extrinsic value
  • Just like call options, the extrinsic value consists of time value and implied volatility. The time value in a long put position will melt just like it did with call options
  • Implied volatility will also work the same way as it did with calls. However, because implied volatility usually surges when the underlying securities price surges, it can actually be helpful in a put’s overall return
  • The “at the money” option is still the option with a strike price closest to the stock price, and may or may not have intrinsic value

 

 

 

And this is the basics of buying and selling puts. It’s a lot like buying and selling calls & I did try to avoid sounding redundant.
As with call options, you can buy to open (“go long”) and sell to close, or you can sell to open (to “short”) and buy to open. It should also be noted that when viewing the options table, call options are located on the left-hand side, the strike prices are located in the center, and the put options are located on the right-hand side. Most brokerages typically display “in the money” options for both calls and puts in a shaded region while “out of the money” options are left unshaded.

Options are made up of two components: intrinsic value (the value of an option that is determined by the stock price) and extrinsic value (which consist of time value of volatility) – in which investors can use implied volatility to benefit from placing put options.

And remember, “in the money” options consist mostly of intrinsic value (but time decay can eat away at this), “at the money options” may or may not have intrinsic value, and “out of the money” options consist mostly of extrinsic value.

I hope you have enjoyed this post and found the information to be quite useful. If you have any questions or concerns, please feel free to leave them down in the comment thread below and make sure to like and share this post.

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