Put Options: What They Are and How They Function

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How Put Options Work

A put option gives the buyer the right to sell 100 shares at a fixed price (strike price) before a specified date (expiration date). Likewise, the seller (writer) of a put option is obligated to purchase the stock at the strike price if exercised. This gives the buyer unlimited potential for profits while the most they would be able to lose would be the premium they paid.

For example, the purchase of the XYZ 100 put for $1 would only risk the $1 paid. If the stock were to close at $100 or above at expiration, the put would expire worthless. If the stock were to go below $99, the holder of this put would make $100 per contract purchased per point below $99.

Puts? What’s The Point?

Put options help to insure your stocks. By purchasing a put option, its guarantees that your stock will not sell below the strike price if you decided to sell.

And this is very beneficial because if your stock was to experience a substantial decrease in price, the put option would protect you from severe loss. Put options also give the buyer the right to sell the stock at the strike price to the seller of the put option (who is obligated to buy if you exercised this option).

On the contrary, if your stock experiences increases in price, then you can just let the put option expire. In this scenario, the buyer would just simply pay the seller the premium.

Thoughts On Put Options

Overall, put options are a great way to safeguard your portfolio from loss. T

hey are especially beneficial to more conservative-leaning investors as the most you are able to lose is the premium you paid. Put options aren’t meant to protect your portfolio from minor dips, but if you expect one of your stocks to dramatically decrease in price, they’re worth considering. You will be glad you did in the long run.

To learn more about options trading, consider subscribing to Cabot Options Trader, headed up by veteran options trader and chief analyst Jacob Mintz.


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