And, you can only sell it up to an agreed-upon date.
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In an American option, if you sell your stock at the strike price before the expiration date, you exercise your put option.
Buy When you buy a put option, that guarantees you'll never lose more than the strike price. You pay a small fee to the person who is willing to buy your stock. The fee covers his risk. After all, he realizes you could ask him to buy it on any day during the agreed-upon period. He also realizes there's the possibility the stock could be worth far, far less on that day. Long Put: If you buy a put without owning the stock, that's known as a long put.
You can also buy a put for a portfolio of stocks, or an exchange-traded fund ETF. That's known as a protective index put.
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It's also known as shorting a put. That's because they must buy the stock at the strike price but can only sell it at a lower price.
The financial product a derivative is based on is often called the "underlying. What Are Call and Put Options?
They make money if the stock price rises. That's because the buyer won't exercise the option. The put sellers pocket the fee.
Put option - Wikipedia
Put sellers stay in business by writing lots of puts on stocks they think will rise in value. They hope the fees they collect will offset the occasional loss they incur when stock prices fall.
Their mindset is similar to an apartment owner. He hopes that he'll get enough rent from the responsible tenants to offset the cost of the deadbeats and those who wreck his apartment.
A put seller can get out of the agreement anytime by buying the same option from someone else. If the fee for the new option is lower than what he received for the old one, he pockets the difference. He would only do this if he thought the trade was going against him.
Dollar put option traders sell puts on stocks they'd like to own because they think they are currently undervalued.
They are happy to buy the stock at the current price because they believe it will rise again in the future. Since the buyer of the put pays them the fee, they actually buy the stock at a discount. Commodities are tangible things like gold, oil, and agricultural products, dollar put option wheat, corn, and pork bellies.
Unlike stocks, commodities aren't bought and sold outright. No one purchases and takes ownership of a "pork belly. These contracts are hazardous because they can expose you to unlimited losses. Unlike stocks, you can't buy just one ounce of gold. A single gold contract is worth ounces of gold. Since the contract is in the future, you could lose hundreds or thousands of dollars by the time the contract comes due.
In commodities, a put option gives you the option to sell a futures contract on the underlying commodity. When you buy a put option, your risk is limited to the price you pay for the put option premium plus any commissions and fees.
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Even with the reduced risk, most traders don't exercise the put option. Instead, they close it before it expires.
Instrument models[ edit ] The terms for exercising the option's right to sell it differ depending on option style. A European put option allows the holder to exercise the put option for a short period of time right before expiration, while an American put option allows exercise at any time before expiration. The put buyer either believes that the underlying asset's price will fall by the exercise date or hopes to protect a long position in it. The advantage of buying a put over short selling the asset is that the option owner's risk of loss is limited to the premium paid for it, whereas the asset short seller's risk of loss is unlimited its price can rise greatly, in fact, in theory it can rise infinitely, and such a rise is the short seller's loss.
They just use it for insurance to protect their losses.