A put option is a contract that gives its holder the right to sell a set number of equity shares at a set price, called the strike pricebefore a certain expiration date. If the option is exercisedthe writer of the option contract is obligated to purchase the shares from the option holder.
Key Takeaways A put option is a contract that gives its holder the right to sell a number of equity shares at the strike price, before the option's expiry.
Behind the jargon of stock option trading
If an investor owns shares of a stock and owns a put option, the option is exercised when the stock price falls below the strike price.
Instead of exercising an option that's profitable, an investor can sell the option contract back to the market and pocket the gain. How Put Options Work There are a number of ways to close out, or complete, the option trade depending on the circumstances. If the option expires profitable or in the moneythe option will be exercised.
If the option expires unprofitable or out of the moneynothing happens, and the money paid for the option is lost.
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- A put option allows investors to bet against the future of a company or index.
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A put option increases in value, meaning the premium rises, as the price of the underlying stock decreases. Conversely, a put option's premium declines or loses value when the stock price rises. Put options provide investors a sell-position in the stock when exercised.
As a result, put options are often used to hedge or protect from downward moves in a long stock position. To complete the transaction, an option writer will need to purchase the shares at that price.
But he might have believed that the stock price could rise. He was willing to pay the option premium for that protection.
If Max doesn't own shares, the option can be exercised to initiate a short position in the stock. A short position is when an investor sells the stock first with the goal of buying the stock or covering it later at a lower price. Initiating a short position requires a margin account with enough money in it to cover the margin on the short trade. The account is typically collateralized by cash or securities.
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Investors should be careful with shorting stocks since a stock could potentially increase in price. If the stock price rises rapidly, many traders might cover their short positions by buying the stock to unwind their short trades. Selling the Option An alternative to exercising an option is to sell the option contract back to the market.
Selling the option is both the easiest and the most commonly used method of closing an option position. In other words, there is no exchange of shares; instead, the investor has a net gain or loss from the change in the option's price.
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- Chuck Kowalski Updated March 11, A person would buy a put option if he or she expected the price of the underlying futures contract to move lower.
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Benefits of Selling the Option There are many benefits to selling an option, such as a put, bitcoin rate fell the expiry instead of exercising it. Closing out a put trade by simply selling the put is popular because most brokers charge higher fees for exercising an option compared to the commission bought a put option selling an option.
If you're considering exercising an option, find out how much your broker charges since it could impact your profits, especially on smaller trades.
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Broker fees vary widely. If you're thinking of starting a trading account, Investopedia has created a list of the best options brokers to help you get started. Bought a put option Accounts.