Put Options are a way of making money in the financial market. And I can understand why you’d want to know more about it because, unlike its counterparts, it can be a little tricky. This article would help in clearing doubts that you might have about buying or selling options or it might just be the push you need.
What is Selling?
Let’s get into a bit of the history of selling. Selling and buying started in the 7th Century BCE in the areas known as turkey and from there it spread along the Mediterranean and then diffuse throughout the world.
Selling is a transaction where a good or service is being exchanged for money. It refers to a process of persuading or cajoling a person or organization to buy something.
The seller or provider of the goods or services completes sales in response to an acquisition or a direct interaction with the buyer at the point of sales.
There is passing ownership between the buyer and seller and this process is complete with the settlement of a price. When an agreement is reached then the transfer of ownership can occur.
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What Are Put Options?
A put or a put option is a financial market derivative instrument that gives the purchaser of the put option the right to sell an asset also called the underlining at a specified price of a specified date to the seller or writer of the put.
The selling ling put option generates immediate portfolio income to the seller put to keep the premium if the support is not exercised by the counterparty and it expires out of the money.
A put option can be a lucrative venture because they are a type of option that increases in value as a stock falls. Its appeal is that they can appreciate quickly a small move in stock price and that feature makes them special to traders who are looking to make big gains asap.
What Are the Types of Options?
There are two types of options: the call option and put option
The Call options allow the owner to buy the underlying stock at a specified price until a specific date. When the stock price goes up, the call option increases in value, all else equal.
In general, if you’re buying a call option, you expect the stock price to rise while put options allow the owner to sell the underlying stock at a specified price until a specific date.
When the stock price goes down, the put option increases in value, all else equal. In general, if you’re buying a put option, you expect the stock price to fall.
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Pros Of Put Options
Traders buy put option to magnify the profits from a stock decline by buying a put you expect the stock price to fall before the expiring date.
Put options have been I’ve been around for more than 40 years but they are only getting the attention they deserve now. many investors believe it is too difficult to understand, risky, and some even consider it a dangerous venture but is that all it’s really about.
Here are the advantages of selling put options.
#1. cost-efficiency- options can be leveraged and an investor can obtain an option position similar to a stock position but with huge cost savings so options are practical and cost-efficient.
#2. Risk is minimal buying options involve in higher risk solon co-owning to owning equities but there are times when options can be used to reduce risk it only depends on how they are used.
It can be less risky for investors because they require less financial commitment than equities and they can be less dangerous due to their relative imperviousness to the potentially catastrophic effects of gap openings options are also the most reliable form of age and this makes them a lot safer than stocks.
#3. Higher Potential Return- Options can deliver higher returns and do so over a short period, using the power of leverage to turn a small sum of money into many times its value
#4. Its Volatile Nature- Options are more volatile than stock and this is why traders and investors are drawn to them.
#5. Options are liquid, meaning they can be exchanged for cash at any time the market is open though there is no guarantee you get what you paid for them.
#6. Options can be a useful strategy when you are an advanced investor this way you know how to limit risk and understand the risk
#7. Put can be used as a type of insurance the protective put strategy the investors buy enough to cover their holdings so if the price of the underlying falls sharply, they can sell it at a strike price.
#8. Put is useful for hedging
CONS
#1. Perfect timing- Investment analyses have to be right, it has to be correct in the right time and place.
#2. It expires- Options expire, and when they do, the opportunity to trade them is over. Options can expire worthlessly – many do – but traders can’t buy and hold options, as they can stocks.
#3. Can be expensive- Options may be relatively more expensive to trade than stocks, though investors can find no-cost options brokers.
#4. Options prices can fluctuate significantly from day to day, and price moves of more than 50 percent are quite common, meaning your investment could decline in value quickly.
#5. Options are not guaranteed by the government, so you can lose money on them.
#6. Depending on exactly how you use options, you can lose more than you invest in them.
#7. Options are short-term vehicles whose price depends on the price of the underlying stock, so the option is a derivative of the stock. If the stock moves unfavorably in the short term, it can permanently affect the value of the option.
Differences between Call and Put Option
#1. The difference between a call option and a put option is simple. An investor who buys a call seeks to make a profit when the price of a stock increases. The investor hopes the security price will rise so they can purchase the stock at a discounted rate while the writer, on the other hand, hopes the stock price will drop or at least stay the same so they won’t have to exercise the option.
#2. The put option allows the investor profits when the stock price falls. In this case, the put increases as the stock decrease in value. So, while the investor hopes the stock price dips, the writer hopes it increases or stays the same, so they don’t have to exercise the trade.
#3. When buying a call option, the buyer must pay a premium to the seller or writer. But the investor doesn’t have to pay the market margin money before the purchase. However, when selling a put option, the seller must deposit margin money with the market. This then provides the advantage to keep the premium sum on the put option.
#4. Call options have unlimited gain potential because the price of a stock cannot be capped. Conversely, put options are limited in their potential gains because the price of a stock cannot drop below zero.
Here are four ways to trade put options in any market
- #1. Long put
- #2. Shortcut
- #3. Bear Put Spread
- #4. Protective put
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#1. Long Put
Along is one of the most basic put option strategies when buying a long put option the investor is bearish on the stock or underlying security and thinks the price of his shares will go down within a certain period.
The more bearish you are when the stock the more out of the money you want to buy the stock but if the stock drops before the expiration date of your contract you will be able to make a nice profit by exercising your put option and selling shares.
#2. Short Put
Also called naked put is a strategy that expects the price of the underlying stock to increase or remain at the strike price the main objective of this strategy is to end the money of premium on the stock the risk of such foods is that your losses can be potentially extensive
#3. Bear Put Spread
A bear put spread is often used when the investor is only moderately bearish on a stock full stop to create a bear put spread, the investor will sell out-of-the-money puts while simultaneously buying and in the money put option at a higher price.
#4. Protective Put
Protective Put is otherwise known as ‘married put’ this strategy is similar to the covered call. It allows an investor to essentially protect a long position on a regular stock.
The protection put according to an analogy proves to be the best example of how options can act as a kind of insurance for a regular stock position.
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Conclusion
A put option is a strategy in the finance market. It’s not very popular as most people don’t understand it because It involves a lot of waiting and risks taking but it can be beneficial if successfully planned and executed
References
- http//:www.investopedia.com
- www.smartcapitalmind.com
- www.bankrate.com
- http//:www.lynalde.com
- www.wallstreetmojo.com
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