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Put Option Trading – “Put”-ting Like A Pro

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Introduction

 

 

A put option is the right to sell, typically, a hundred shares of the security at a certain price, by a specific day.

This is different from a call option that gives the buyer the right to buy a security.

In this lesson, you will learn about the premise of put option trading, such as: the characteristics of a put option contract and how it differs from a call option contract. You’ll also discover how options contract terms like, strike price, and intrinsic and extrinsic values are applied in put options. And lastly, you’ll learn how to read a put option table.

 

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.

 

Put Option Premium: “Puts” Away!

 

 

Most of these terms are familiar to you already. The key is learning how they apply to put option contracts.

Remember that a call option rises in value as a stock rises. Well, a put option is just the opposite – it rises in value as the stock falls.

Like I said, it may seem counter-intutive but the value of your contract goes up when the underlying stock price goes down. But just remember that a put option gives you the right to sell the stock.

Anytime you’re selling something, you want to get the best possible price for it. Because the put option gives you the right to sell the stock at a certain price, the lower the stock falls the more your option is worth.

Of course, buying puts isn’t the only use of these contracts. Just like calls, if you buy a put, someone else is selling one.

If the put option buyer has the right to sell the stock at a certain price, the put option seller has the obligation to buy the stock at a certain price.

To understand the role of an option buyer and seller better, lets look at a transaction.

You’re bearish on a stock, so you want to buy a put. The option market enables you to find an option seller.

The options seller is probably bullish, frankly we need him to be bullish, so we can be bearish.

 

 

If the stock drops, you’ll profit and he’ll lose. If the stock rallies, you may lose the price you pay for the option, but he gets to keep that amount.

Of course, you can be the buyer or the seller, which means if you’re bullish on the stock, then you can choose to sell a put.

You learned what a put option is and how it differs from call options.

We also discovered that put options increase in value as the underlying stock decreases in value. This means puts can be used in bearish markets.

 

 

Quick Recap

In Review….

Put Option Trading

 

  • Remember that a call option rises in value as a stock rises. Well, a put option is just the opposite – it rises in value as the stock falls
  • Like I said, it may seem counter-intutive but the value of your contract goes up when the underlying stock price goes down. But just remember that a put option gives you the right to sell the stock
  • Anytime you’re selling something, you want to get the best possible price for it. Because the put option gives you the right to sell the stock at a certain price, the lower the stock falls the more your option is worth
  • Of course, buying puts isn’t the only use of these contracts. Just like calls, if you buy a put, someone else is selling one
  • If the put option buyer has the right to sell the stock at a certain price, the put option seller has the obligation to buy the stock at a certain price
  • We also discovered that put options increase in value as the underlying stock decreases in value. This means puts can be used in bearish markets

 

 

 

And this was another lesson to help strengthen your knowledge on put options. Put options are a lot like call options as we have already established – but this type of option only gains merit during the downswing of a stock, perfect for bear traders/investors and bear markets.

An investor can use put options to their advantage by buying or selling puts. For bullish investors/traders, you would most likely sell a put, hoping the stock is above the strike price at expiration in order for you to keep your premium (the “credit” a seller receives from the option buyer). For bearish investors/traders, you would most likely buy a put, hoping the stock is below the strike price at expiration in order to reclaim your debit (premium paid to the seller at the beginning of the trade).

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.
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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