The Basics Of buying and selling Put Options

Put options are contracts that are used by investors who anticipate the market on the underlying stock or security to go down. A bearish market can make put option investing profitable. The option gives the holder the right to sell the stock at a set price (strike price).

If the market declines on the underlying stock or other security, the premium that was paid originally will now be higher. This will allow the person to either sell the put option in the open market and gaining or he can excerise the put for it's full intrinsic value. A person can buy the stock (now trading lower) in the open market and then exercise his put at the strike price. He would have to do this before the contract expires. All option contracts are based on 100 shares and expire monthly.

Put Option Example

BUY 1 IBM SEP 50 PUT @3.00

Purchasing this IBM put option cost the investor $300. The contract is based on 100 shares and expires in September. The holder has the right to sell 100 shares of IBM at $50, and he has until September (near the end of the month) to either trade out of it or exercise it. The $300 or 3 points is the maximum loss, if the contract expires. The investor needs the market to fall 3 points for the person to "break-even".

The maximum gain on this position is $4700, since the market can fall to zero.
The maximum loss is the premium of $300 paid
The break even is 47.

Writing or selling Put Options

When you short a put option, you are writing the contract. The writer collects the premium instead of paying. The seller has an obligation that carries risk. He must purchase the underlying stock from the holder of the put at the strike price. If the market is significantly lower at this time, the writer will have a large loss. It is in the best interest of the seller if the put expires worthless. This will result in a loss for the buyer and a gain for the seller.

Writing put options work well with existing short positions.

Recommended Book Titles on Options

Options as a Strategic Investment - Reflecting today’s market realities and the new innovative options products available, this fourth edition features an in-depth analysis of volatility and volatility trading; updated information on all stock option strategies, reflecting recent market conditions; buy and sell strategies for Long Term Equity Anticipation Securities (LEAPs); detailed guidance for investing in the growing field of structured products; the latest developments in futures and futures options; and the market impact of the most recent changes in the margin rules.

Options Made Easy : Your Guide to Profitable Trading (2nd Edition) - This book can be used by any options trader, although it is fair to say that it is most specifically targeted toward novices and intermediates. Simplicity is the name of the game here, and I have made it my mission to enable anyone and everyone to learn and apply the benefits of options trading simply and easily. By giving you a grounding that is second to none, we look to give you the solid foundations required to give you the confidence to enable you to become a dynamic and successful trader. And we want it to be a fun and pleasurable experience too!

Option Volatility & Pricing: Advanced Trading Strategies and Techniques - Written in a clear, easy-to-understand fashion, Option Volatility & Pricing points out the key concepts essential to successful trading. Drawing on his experience as a professional trader, author Sheldon Natenberg examines both the theory and reality of option trading. He presents the foundations of option theory explaining how this theory can be used to identify and exploit trading opportunities. Option Volatility & Pricing teaches you to use a wide variety of trading strategies and shows you how to select the strategy that best fits your view of market conditions and individual risk tolerance.

Options and Options Trading : A Simplified Course That Takes You from Coin Tosses to Black-Scholes - Options and Options Trading breaks the code that envelops the often-foreign language of options, providing an accessible introduction into how the options market works as it explains the rules that traders must understand if they hope to take part in this high-leverage, high-profit game. Author Robert Ward's goal is simple--to demystify the tangled world of options trading without leaving readers too confused and frustrated to continue.

Bond Yield
Call Option
Commodities Broker
Convertible Bonds
Corporate Bond Debenture
Foreign Exchange Trading
Forex Trading Broker
Forex Trading System
General Obligation Municipal Bonds
Life Insurance Broker
Municipal Bonds
Option Spreads
Put Options
Real Estate Appraisal
REIT - Real Estate Investment Trust
Selling Bonds
Sell Bonds To Banks

Home - Call Option