How do put stock options work. What are put options? How to trade them for profits? Learn everything about put options and how put option trading works.

How do put stock options work

How Do Stock Options Work? - Learn How to Trade Stock Options for Beginners

How do put stock options work. What are put options? How to trade them for profits? Learn everything about put options and how put option trading works.

How do put stock options work


If you think a stock's going to go down in value -- and you're right -- buying a put option is a good way to turn a profit. A put option gives you the right, but not the obligation, to sell or "put" a specific stock to another investor within a certain time period. As a leveraged bet against a stock, a put option can move up greatly in value if the underlying stock falls.

However, the opposite is also true -- if your bet is wrong, you could lose your entire investment. While you can buy many different kinds of stock options, they all share the same basic terminology, which makes it much easier to understand an otherwise complicated subject. Each option controls shares of underlying stock and is quoted in the format "name, month, price. The expiration month shows you when your option expires, or ceases to exist, while the strike price represents the price at which you can sell your stock to another investor.

Options can be confusing for investors because they don't really carry any value of their own. Options are known as "derivatives" because they derive their value from another investment, such as a stock. One of the two variables that give a put option value is referred to as its intrinsic value.

A put option's intrinsic value is the dollar amount by which the stock is "in-the-money," or below the put option's strike price. The more the stock drops in price, the more money you can make on a put option since its intrinsic value will keep going up. You can't buy an option certificate and put it away in your safe, hoping it appreciates in value like a stock certificate or the title to a home.

In fact, the longer you hold your option, the more it loses time value, which is the second component to option valuation. An option's time value is the amount of the option's market price that exceeds its intrinsic value.

Options have more time value the farther away the expiration date is, as it affords the option holder more time to cash in on a movement in the underlying stock price.

If it is only June and you own an October put, you have four months in which the stock price might fall and generate a profit for you.

This time period has value, and it is reflected in the time value of the option. You can sell your put option on the open market anytime you are happy with your profit, or perhaps to avoid further losses. However, you can also exercise the option anytime before the expiration date on the contract.

Exercising the option means that you are selling the stock to an investor at the specified price. Put options expire at the close of business on the third Friday of the option month. If the option has no intrinsic value at that time, your option will expire worthless, since the time value will have ticked down to zero.

Csiszar has served as a technical writer for various financial firms and has extensive experience writing for online publications. Put options can be high-risk, high-return investments.

Terminology While you can buy many different kinds of stock options, they all share the same basic terminology, which makes it much easier to understand an otherwise complicated subject. Intrinsic Value Options can be confusing for investors because they don't really carry any value of their own.

Time Value You can't buy an option certificate and put it away in your safe, hoping it appreciates in value like a stock certificate or the title to a home. Exercise You can sell your put option on the open market anytime you are happy with your profit, or perhaps to avoid further losses. Expiration Put options expire at the close of business on the third Friday of the option month.

References Options Clearing Corporation: What Is an Expired Option? How to Put Straddles on Volatile Stocks. More Articles You'll Love.

Stock Options Explained in Plain English. Tax Treatment of Selling Put Options.


More...

1962 1963 1964 1965 1966