This pre-determined price that buyer of the put option can sell at is called the strike price. Put options are traded on various underlying assets, including stocks, currencies, bonds, commodities, futures, and indexes. A put option can be contrasted with a call optionwhich gives the holder the right to buy the underlying at a specified price, either on or before the expiration date of the options contract. Key Takeaways Put options give holders of the option the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time frame. Put options are available on a wide range of assets, including stocks, indexes, commodities, and buy put option.
This leverage allows you to reap outsized rewards if you're correct; if you're wrong, the most you'll lose is the premium paid. The put strategy also allows you to make bearish bets against indexes and sectors by buying puts on exchange-traded funds that track them.
Why not just short? Buying puts has its advantages over outright shorting a stock -- where you borrow stock from a broker with the hope of buying it back at a lower price and keeping the difference.
Chuck Kowalski Updated March 11, A person would buy a put option if he or she expected the price of the underlying futures contract to move lower. A put option gives the buyer the right, but not the obligation, to sell the underlying futures contract at an agreed-upon price—called the strike price —any time before the contract expires. Calls are the other type of option.
For one, with puts, your maximum loss is the premium you paid, whereas with a short, your potential losses are unlimited. Another problem with shorting outright is that you can't always do it.
Sometimes the stocks you want to short the most are hard to come by, and brokers can't find any shares to lend out. When you buy a put, on the other hand, you're not on the hook to pay periodic buy put option, though anticipated dividend payments do affect the price of the option to some degree.
Tread carefully, Fools Even if you think a stock is poised to plunge, remember that the stock market can be irrational in the short run, and that options have a finite life. What you consider a "sure thing" buy put option take more time to materialize than the option affords, so be comfortable with the risks you're taking before you place the trade.
To review: Your maximum loss when you buy a put is the premium paid, but that's still cash that you'd otherwise have in your pocket, so allocate it as carefully as you would any other investment. In full appreciation of that risk, buying puts offers you a way to bet against stocks, indexes, and sectors without exposing your portfolio to potentially unlimited losses that you would incur by straight shorting.
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