Put Option Definition
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Put option - Wikipedia
What Is a Put Option? James Royal, Ph. May 22, Many or all of the products featured here are from our partners who compensate us.
What Are Put Options? Buying put options is a bearish strategy using leverage. It is a risk-defined alternative to shorting stock. The trader is either risk-averse. They want to know beforehand their maximum loss or they wants greater leverage than simply shorting stock.
This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Put options are the lesser-known cousin of call options, but they can be every bit as profitable and exciting as their more popular relative.
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Put options allow buyers to magnify the downward movement of stocks, turning a small price decline into a huge gain for the put buyer. Put options The basic question in an options trade is this: What will a stock be worth at some future date?
There are only two answers: more or less. The put buyer pays a premium per share to the put seller for that privilege. Put buyers generally expect the stock to decline, and a put provides a higher potential profit than short selling the stock.
First, if she owns the stock, she can exercise the contract, putting the stock to the put seller at the strike price, effectively selling the stock at an above-market price and realizing the profit. Second, the buyer can sell the put before expiration in order to capture the value, without having to sell any underlying stock.
The graph below shows the buyer's profit on the put at expiration when the stock is at different prices. Selling a put option In contrast to put buyers, put sellers have an obligation to buy the underlying stock at the strike price until expiration. The put seller must have either enough cash in the account or margin capacity to buy the stock from the put buyer.
What Is a Put Option? - NerdWallet
However, the put option typically will not be exercised unless the stock price is below the strike price; that is, unless the option is in the money.
Put sellers generally expect the underlying stock to remain flat or move higher. If the stock declines below the strike price before expiration, the option is in the money.
The seller will be put the stock and must buy it at the strike price. If the stock stays at the strike price or above it, the put is out of the money, and the put seller keeps the premium and can sell puts again.
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The graph below shows the seller's profit on the put at expiration when the stock is at different prices. The option continues to cost the put seller money as the stock declines in value. Find the best brokers for options trading Puts vs. The other is short selling.
The difference in sell and buy prices is their profit. There's a reason why put buyers get excited. Buying puts offers better profit potential than short selling if the stock declines substantially. In contrast, short selling offers less profitability if the stock declines, but the trade becomes profitable as soon as the stock a put option is profitable if lower.
The biggest advantage for short-sellers, though, is that they have a longer time horizon for the stock to decline. While no stocks have soared to infinity yet, short-sellers could lose more money than they a put option is profitable if into their initial position. If the stock price continued to rise, the short-seller might have to put up additional capital in order to maintain the position. Meanwhile, a put seller has limited upside and significant downside.
More put option strategies Put options remain popular because they offer more choices in how to invest.
They allow investors to: Limit risk-taking while generating a capital gain. Put options can be used to limit risk.
Both strategies have a similar payoff, but the put position limits potential losses. Generate income bitcoin how to make money on the Internet the premium. Even on low-volatility, high-quality stocks, investors could see annualized returns in the low teens.
Realize more attractive buy prices.
Get the best rates
Investors use put options to achieve better buy prices on their stocks. If the stock remains above the strike, they can keep the premium and try the strategy again. James F. Royal, Ph. Twitter: JimRoyalPhD.
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