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Put Options.
Put options give you the right to sell something at a specific
price for a fixed amount of time.
The
trader can buy puts when he (she) believe that stock or index will
fall in price. The one who bought a put has the right, but not
the obligation, to sell the underlying stock at the strike price
of the option until the expiration date. If a trader buys a put
option, the risk of the trade equals the money paid for the
option. If the price of the stock or index moves lower the put
buyer can get profit.
You have three options if you own a put:
- You can let the option expire
worthless.
- You can exercise your right to short the market.
- You can sell put options.
The put seller or a writer has the obligation of buying an
underlying security from the put buyer for a strike price until
the expiration date.
Example:
Current stock price is $40 and you
might buy a put to sell the stock to the put writer at the strike
price $36 for three month for $1.
- If the stock declines to $30 you exercise the option and
demand that the put seller buy your stock at $36 (you can buy it
at $30 in the stock market). You keep the difference that is
your profit. In this case by investing $1 you are making $6
(600%).
- If the stock goes to $45 your put expires worthless, you
lose your premium and put seller keep the premium.
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