What is a Put Option?
How to make money when stock price fall.
Imagine you own a brand-new phone that cost you $1,000. You’re worried that in the next few months, a newer model will come out, making your phone’s value drop. So, you find a buyer willing to sign a deal: they agree to buy your phone for $1,000 anytime in the next three months, no matter what happens to the market price. If the price of your phone drops to $700, you can still sell it to that buyer for $1,000, securing a nice deal for yourself. That agreement works just like a put option—it gives you the right to sell something at a fixed price, even if the market price goes down.
A put option is like a special ticket that lets you sell a stock at a fixed price before a set date. It’s useful if you think the stock price will drop. If the stock falls, you can sell it for more than its market value and make a profit!
How Does It Work?
Let’s say you buy a put option for Stock XYZ:
The option lets you sell XYZ for $50 anytime before next month.
Right now, XYZ is at $55, but you believe it will drop.
If XYZ falls to $40, you can still sell it for $50, making a $10 profit per share (minus the option’s cost, called the premium).
If XYZ stays above $50, your option expires worthless, and you only lose the premium you paid.
Why Do People Use Put Options?
To Make Money When Stocks Fall: Traders buy put options if they expect a stock to go down.
To Protect Their Investments: Investors use put options as insurance. If they own a stock and it drops, their put option helps reduce the loss.
To Earn Extra Income: Some traders sell put options, collecting a fee (premium) hoping the option never gets used.
Key Terms to Know
Strike Price: The price at which you can sell the stock.
Premium: The cost of buying the put option.
Expiration Date: The deadline for using the option.
In the Money: When the stock price is lower than the strike price.
Time Decay: Options lose value as they get closer to expiration.
Wrapping Up
Put options help traders make money when stocks drop or protect their investments from losses. Learning how they work can give you an advantage in the market!
Quick Glossary
Put Option – A contract that lets you sell a stock at a fixed price.
Strike Price – The price you can sell at, according to the option.
Premium – The fee you pay to buy the option.
Expiration Date – The last day you can use the option.
Hedging – Protecting your investments from losses.