Put Option

What Are Put Options and How Do They Work?

A put option is an options contract that awards its buyer the right (however not the obligation) to sell a specific quantity (typically 100 shares) of an asset (like a stock) at a specific price prior to the date of the contract's expiration.
In exchange for this right, the option buyer pays the option seller a premium. A put option is considered a derivative security in light of the fact that its value is derived from the value of an underlying asset (e.g., shares of a stock). Investing in a put resembles betting that the price of a stock will go down before the put contract terminates. In other words, puts are typically bearish investments.

Put Options versus Call Options

Put options are something contrary to call options. While puts give their owners the right to sell something at a specific strike price, calls give their owners the right to buy something at a specific strike price.
A put investor wagers on the value of a security going down (which would permit them to sell shares for more than they're worth or sell the contract for more than they paid), while a call investor wagers on the value of a security going up (which would permit them to buy shares for short of what they're worth or sell the contract for more than they paid).

How Might You Make Money on a Put Option?

Investors can realize gains from put options in one of two different ways — reselling or exercising.
Each option has a premium (market value) for which it very well may be bought and sold, and this premium changes over time in view of factors like the contract's intrinsic value (the difference between the strike price of the contract and the market price of the underlying asset), time remaining until expiration, and the volatility of the underlying asset.
To create a gain, an options trader could buy a put option for a security they accept will go down in value. Assuming that this happens, the option's premium will increase, and the contract holder can resell the option for its new, higher premium, pocketing the difference between what they sold it for and what they bought it for.
On the other hand, an investor could purchase a put option contract with a strike price equivalent to an underlying security's market price in the hopes that the security will lose value. On the off chance that the underlying security goes down in price, the option holder can exercise the option and sell shares at the strike price, which is higher than the market price of the underlying asset. Their profit here would be the strike price of the put minus the market price of the security times 100 shares, minus the premium they paid for the contract.
It's memorable's important here that the premium an investor pays for a contract is part of their cost basis and ought to be figured in while deciding when to sell or exercise an option for profit. Options investors possibly create a gain in the event that their gains surpass the premium they paid for the option contract being referred to.

How Might You Tell in the event that a Put Option Is in the Money (ITM) or Out of the Money (OTM)?

Options that have intrinsic value are thought of "in the money," while options that don't are thought of "out of the money."
A put option is in the money and has intrinsic value in the event that its strike price is higher than the market price of the underlying asset (this is likewise called the spot price). For instance, a put option with a strike price of $60 and a spot price of $50 would be in the money by $10 since, supposing that it was exercised right away, the resulting shares could be sold for $10 more than they are worth. In other words, this particular put contract would have $10 worth of intrinsic value since it concedes its owner the right to sell shares of stock for $10 more than whatever they're worth.
Intrinsic value is constantly included in an option's premium, so there would be no point in buying an in-the-money put just to exercise it right away, as its premium would incorporate its intrinsic value, so no gains would be realized. Assuming an investor purchased the theoretical put option talked about above, they would do as such in the hope that the underlying asset would continue to fall in price, causing the option's intrinsic value to surpass the premium they paid for it before exercising or reselling the contract.
On the off chance that a put option's strike price was lower than its spot price, it would be viewed as out of the money since it would lack intrinsic value. In other words, there would be no point in exercising an OTM put since, in such a case that you did, you'd sell shares for not as much as what you could sell them for on the open market.

Step by step instructions to Trade Put Options

Options like puts can be traded by means of most famous trading platforms like Charles Schwabb, Robinhood, WeBull, and Fidelity. Typically, notwithstanding, investors must apply for endorsement from their brokerage before beginning to trade options. Options can likewise be traded straightforwardly — not through a specialist — on the over-the-counter (OTC) market.

3 Common Put-Trading Strategies

There are numerous ways of trading puts, however the following three strategies are among the most common.

1. Long Put

A long put is presumably the most direct put-trading strategy. On the off chance that an investor is bearish on a stock (i.e., they think it will go down in value), they can buy a put option on it. Assuming they pick an option whose strike price is at or below the underlying asset's market price (i.e., one that is out of the money), there will be no intrinsic value included in the contract's premium.
On the off chance that the stock being referred to goes down in sufficient value before the contract lapses, the option would gain intrinsic value by moving into the money, and the investor could either resell it for a profit or exercise it in order to sell shares of the underlying stock for more than they're worth.

2. Naked or Uncovered Put

A naked put is really a bullish strategy. In the event that an investor recognizes a stock that they wouldn't see any problems with owning (i.e., something they think has long-term value paying little mind to short-term price volatility) and that they think will go up in value in the short term, they can compose or sell a put option on that stock. The buyer of the put option thinks the price of the underlying stock will go down, yet the seller believes that it should go up.
In the event that the value of the underlying stock goes up (over the strike price), it lapses worthless and the seller will pocket the premium of the contract. In the event that the value of the underlying stock goes down, the buyer might decide to exercise the contract, which would bring about the seller buying 100 shares above market value.
Recollect here that the seller composed the put on a stock they like in the long term, so notwithstanding the way that they sustained a loss by purchasing 100 shares for more than market value, they don't mind owning the shares, as they think the stock's market value will rise in the long term.

3. Protective/Married Put

A protective (or married) put is really a risk-moderation strategy for a long on a genuine stock investor (or other security). In other words, assuming an investor claims a stock and accepts it will go up in value, they can buy put options on that stock (one contract for every 100 shares they own) with strike prices equivalent to the price they paid for the real shares of stock they own.
In the event that the value of the stock being referred to goes up (as the investor accepts it will), their shares gain value, yet they lose the premiums they paid for the put contracts. This is definitely not an immense deal, as premiums aren't close to as costly as the real assets they get their value from.
In the event that, then again, the value of the stock being referred to goes below the strike price of the contracts, the investor can just exercise their contracts and sell their shares for the strike price. In the event that the strike price they picked was equivalent to their buy-in price, they lose no money beside the premiums paid for the contracts.
Basically, a protective put is an insurance policy an investor takes out to forestall major losses that could happen on the off chance that a stock they own loses a lot of value.

4. Bear Put Spread

While long puts are generally more bearish on a stock's price, a bear put spread is many times utilized when an investor is just decently bearish on a stock.
To make a bear put spread, the investor sells an out-of-the-money put while at the same time buying an in-the-money put option at a higher price, both with a similar expiration date and same number of shares.
Dissimilar to the short put, the loss for this strategy is limited to anything the investor pays for the spread on the grounds that the most terrible that can happen is that the stock closes over the strike price of the long put, making the two contracts worthless. In any case, the max profit an investor can make is likewise limited.
One bonus of a bear put spread is that volatility is basically a nonissue given that the investor is both long and short on the option (inasmuch as the options aren't dramatically out of the money). Also, time decay, similar as volatility, isn't as quite a bit of an issue given the balanced structure of the spread.
Basically, a bear put spread utilizes a short put option to fund a long put position and minimize risk.

For what reason Do Investors Buy Put Options?

Numerous investors find put options appealing in light of the fact that they don't need a large amount of up-front capital. This is on the grounds that puts permit a trader to profit off the downward price movement of a stock (in pieces of 100 shares) without really purchasing the shares themselves.
Furthermore, risk is limited, as the most an option buyer stands to lose is the premium or cost of the options contract itself — not the total value of the underlying shares. Shorting a stock is like buying a put option in that a bet share price will fall.
Basically, put options permit bearish traders to wager on price drops without having to purchase, borrow, or sell real shares, which requires more capital and accompanies more risk.

Buying a Put versus Shorting a Stock: What's the Difference?

On the off chance that an investor buys a put option, they pay a premium for every one of the 100 shares included in the contract, so assuming that the contract lapses out-of-the-money (worthless) they just lose the premium they paid.
While shorting, then again, an investor borrows real shares of stock to sell (with the hope of buying them back at a lower market price later on before returning them to the lender), so in the event that the stock goes up essentially instead of going down, they stand to lose significantly more money. Basically, possible losses on a put are capped at the put's premium, while losses on a short are not capped on the grounds that they rely upon just how much a stock becomes more expensive before they need to return it.

Features

• Put option prices are affected by changes in the price of the underlying asset, the option strike price, time decay, interest rates, and volatility.
• Put options are accessible on a great many assets, including stocks, indexes, commodities, and currencies.
• Put options increase in value as the underlying asset falls in price, as volatility of the underlying asset price increases, and as interest rates decline.
• Put options lose value as the underlying asset increases in price, as volatility of the underlying asset price diminishes, as interest rates rise, and as the opportunity to expiration approaches.
• Put options give holders of the option the right, yet not the obligation, to sell a predefined amount of an underlying security at a predetermined price within a predetermined time span.

FAQ

Is Buying a Put Similar to Short Selling?

Buying puts and short selling are both bearish strategies, yet there are a few important differences between the two. A put buyer's maximum loss is limited to the premium paid for the put, while buying puts doesn't need a margin account and should be possible with limited amounts of capital. Short selling, then again, has theoretically unlimited risk and is fundamentally more costly in light of costs, for example, stock borrowing charges and margin interest (short selling generally needs a margin account). Short selling is therefore viewed as a lot riskier than buying puts.

I'm New to Options and Have Limited Capital; Should I Consider Writing Puts?

Put writing is an advanced option strategy implied for experienced traders and investors; strategies, for example, writing cash-got puts likewise need a lot of capital. On the off chance that you're new to options and have limited capital, put writing would be a risky undertaking and not a suggested one.

Would it be advisable for me to Buy In the Money (ITM) or Out of the Money (OTM) Puts?

It really relies upon factors like your trading objective, risk hunger, amount of capital, and so on. The dollar outlay for in the money (ITM) puts is higher than for out of the money (OTM) puts since they give you the right to sell the underlying security at a higher price. In any case, the lower price for OTM puts is offset by the way that they likewise have a lower likelihood of being profitable by expiration. To spend too much for protective puts and are willing to acknowledge the risk of a humble decline in your portfolio, then OTM puts may be the best approach.

Might I at any point Lose the Entire Amount of the Premium Paid for My Put Option?

Indeed, you can lose the whole amount of premium paid for your put, in the event that the price of the underlying security doesn't trade below the strike price by option expiry.