When you purchase a PUT OPTION, you have...
THE RIGHT (but not the obligation) TO SELL A FIXED NUMBER OF SHARES AT A FIXED PRICE ON OR BEFORE A FIXED DATE.
STOCK OPTION GLOSSARY:
STRIKE PRICE - This is the fixed, pre determined price at which you can sell the shares. This cannot be changed throughout the life of the option.
EXPIRY - This is the date at which the option contract expires. This cannot be changed throughout the life of the option, and there after the contract is worthless.
EXERCISE - The process of fulfilling the put option contract and selling the shares. This can be done any time up to and including the option expiry date.
PREMIUM - The amount you pay for the option contract. Each stock has set strike prices for trading. Depending on where the strike price is in relation to the current share price, influences the amount you pay.
EXPIRY - This is the date at which the option contract expires. This cannot be changed throughout the life of the option, and there after the contract is worthless.
EXERCISE - The process of fulfilling the put option contract and selling the shares. This can be done any time up to and including the option expiry date.
PREMIUM - The amount you pay for the option contract. Each stock has set strike prices for trading. Depending on where the strike price is in relation to the current share price, influences the amount you pay.
In the U.S one option contract relates to 100 shares and on the Australian stock market it would relate to 1,000 shares.
Options give you control over these shares at a fraction of the cost of buying the stock itself.
For example, XYZ stock might cost you $ 15.00 to buy, whereas $ 1.50 might buy you an XYZ call option that would give you control over that stock.
Options give you control over these shares at a fraction of the cost of buying the stock itself.
For example, XYZ stock might cost you $ 15.00 to buy, whereas $ 1.50 might buy you an XYZ call option that would give you control over that stock.
SO HOW DO YOU PROFIT FROM PUT OPTIONS?
You would buy Put Options if you had a bearish view on the stock market or a particular stock, as they give you the right to sell shares. The value of a Put Option INCREASES AS THE SHARE PRICE FALLS
You actually stand to PROFIT if the share price drops!
There are several ways Put Options can be used...
As INSURANCE:
Put Options can be used as insurance over shares you own when investing for the long term.
Just as you would insure your house or car, by insuring your shares (hedging), you are protecting your investment should the market fall or suddenly crash.
Just as you would insure your house or car, by insuring your shares (hedging), you are protecting your investment should the market fall or suddenly crash.
As INCOME:
Stock Options allow you to make money in the stock market, whether prices are rising or falling.There are countless different options trading strategies all with their own degree of risk, that may help earn you an income.
A common, but powerful income strategy is to trade Put Options in a FALLING market.
This is called Short Term Trading.
Because the value of a Put Option increases once the share price has dropped, the trader's objective with this strategy is to buy Put Options only to later sell them at a profit.
Option Trading Related Links
- Options Trading
- Learn exactly how to trade stock options with Homestudy DVD programs or Live Sessions.
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