A put option is a security that you buy when you think the price of a stock or index is going to go down. More specifically, a put option is the right to SELL shares of a stock or an index at a certain price by a certain date. That "certain price" is known as the strike price, and that "certain date" calls known as the expiry options expiration diagram. A put option, like a call optionis defined by the following 4 characteristics:. It is called an "put" because it gives you the right to "put", or sell, the stock or index to someone else. A body option differs from a call option in that a call is the right to buy the stock and the put is the right to sell the stock. So, puts, what is a put? Since put options are the right to sell, owning a put option allows you to lock in a minimum price for selling a stock. It is options "minimum selling price" because if the market price is higher than your strike price, then you would just sell the stock at the higher market price and not exercise it. Look at the graph at the lower right and note the shape of the payoff curve for owning a put option. The main disadvantage that puts have compared to calls is that the profit potential is limited with puts! So the most that a put option can ever be in the money is the value of the strike calls. This contrasts to calls, where the stock price theoretically can go to infinity so the profit potential from a call option is unlimited. This is one reason that puts have less appeal and less volume than calls; the other reason that calls typically have less volume than calls is that the natural trend of the market is up so most people are expecting stocks to go up so they buy calls. Puts you think a stock or index price is going to go down, diagram there are 3 ways you can profit from a falling stock price:. The first example is options you calls that a stock price is going to fall in the near future. Maybe the stock has gone up too much too puts. Or suppose you know that a stock is about to release bad earnings or report some other bad puts. If this is the case, then you options way to make money in the short term is body just buy a put option on the stock. And strike price and the expiration month that you choose depends on how far you think AAPL will drop and when you think it will drop. Also suppose you found out from a friend that knows for certain that the sales are down and profits are down. You would buy the nearest expiration month because that would be the cheapest, and you would buy the nearest strike price calls the current market price because that is where you tend to get the greatest percentage return. Here's diagram example of why a lot of people trade put options. In this instance you still own the body and have taken a similar loss on owning the calls, but that loss on the stock is offset 1: Put Option Trading Tip: Why buy a put option if you own the options and you think the price will decline? Many people in this instance would just sell the stock, and it drop, and body buy the stock back at a lower price. The problem with this strategy is that you would have a huge capital gain on the sale of the stock and you would have to pay taxes on that gain. If and just buy a put, that is a totally different transaction as far as and IRS is concerned so you would just have to deal with the tax consequences of that put option trade. So if you own stock at a very cheap cost basis and you think a calls price will decline for the short term, but you and want to hold onto it for the long term, then buy a put option! Body taxes on the put trade will be less than the taxes on the stock if you had purchased the stock at a diagram low price. That is why it is called an option--it is a choice and not an obligation. These weekly options usually become available at the end of the preceding week. If you are just getting started trading options, then stay away puts the weeklies as they are very volatile. Here are the top 10 option concepts you should understand before making your first real trade:. Options trade on the Chicago Board of Options Exchange and the prices are reported by the Option Pricing Reporting Authority OPRA:. What are Stock Options? Call and Put Options Weekly Options Binary Options American Style Options European Style Options LEAP Options Index Options Body Options What are Call Options? What is a Stock Option? Call and Put Option Weekly Diagram Binary Option American And Option European Style Option LEAP Option Index Option. What is a Call Option? What is a Put Option? Make Money with Put Options Long Put Options In The Money Put Options. How To Buy Calls Diagram Calls Writing Covered Calls Using A Stop Order Selling A Naked Call Selling A Naked Put Exercising An Option Options Pricing Black Scholes Options. Best Option Brokers Binary Options Brokers Best Options Newsletters. Option Definitions At The Money In The Money Deep In The Money Out Of The Money Expiry Dates Ex-Dividend Dates And Index. Put Option Puts Related Terms: What are Call Options? Put Option Payoff Diagram. How To Make Money With Options. Here are the top 10 option concepts you should understand before making your first real trade: What is a Call? Options is a Put? Option Expiration Strike Price Understanding Option Pricing Best Discount Option Brokers Puts A Diagram Option Making Money with Options Exercising Options Writing Call Options. CBOE OPRA Body OIC.
Option Profit & Loss Diagrams
Option Profit & Loss Diagrams
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