Put Options Explained: What Are they, How to Buy and Sell (2024)

FAQs

Put Options Explained: What Are they, How to Buy and Sell? ›

A put option ("put") is a contract that gives the owner the right to sell an underlying security at a set price (“strike price”) before a certain date (“expiration”). The seller sets the terms of the contract. The buyer pays the seller a pre-established fee per share (a "premium") to purchase the contract.

Buying a put: You have the right to sell a security at a predetermined price. Selling a put: You must buy the security at a predetermined price from the option buyer if they exercise the option.

An option is a contract giving the buyer the right—but not the obligation—to buy (in the case of a call) or sell (in the case of a put) the underlying asset at a specific price on or before a certain date. People use options for income, to speculate, and to hedge risk.

What is a put option? A put option gives you the right, but not the obligation, to sell a stock at a specific price (known as the strike price) by a specific time — at the option's expiration. For this right, the put buyer pays the seller a sum of money called a premium.

Traders buy put options if they expect that the price of the asset is going to decline. Traders sell call options and put options in the opposite direction. That is, a trader would sell a put option if they are bullish on the price of the underlying asset.

Put buyers make a profit by essentially holding a short-selling position. The owner of a put option profits when the stock price declines below the strike price before the expiration period. The put buyer can exercise the option at the strike price within the specified expiration period.

A put option gives the buyer the right, but not the obligation, to sell an asset at a specified price (the strike price) before the option's expiration date. A call option gives the buyer the right, but not the obligation, to buy an asset at a specified price (the strike price) prior to its expiration date.

The most common options trading strategies to generate income are covered calls and cash-secured puts. A covered call involves selling a call option on an underlying asset that you own, and the premium collected from the sale of the call option provides income.

A naked call option is when an option seller sells a call option without owning the underlying stock. Naked short selling of options is considered very risky since there is no limit to how high a stock's price can go and the option seller is not “covered” against potential losses by owning the underlying stock.

Can I buy a put option without owning the stock? ›

Investors don't have to own the underlying stock to buy or sell a put. A reminder: Just like call options, put options are considered derivatives because their value is derived from another security (e.g., stock, bonds, index or currency).

The absolute worst-case scenario for a put sale is that you are forced to buy a stock whose market price goes to zero, in which case you'll never be able to re-sell it at all, and you'll have to accept the complete loss of the money you paid to buy it at the strike price.

In this beginning option trading strategy, the trader buys a put — referred to as “going long” a put — and expects the stock price to be below the strike price by expiration. The upside on this trade can be many multiples of the initial investment if the stock falls significantly.

However, while the collar strategy is considered one of the safest options strategies, it does have limitations. By selling the call option, you cap your upside potential. If the stock price rises above the strike price of the call option, you might end up selling the stock at a lower price than the market value.

You can get started trading options by opening an account, choosing to buy or sell puts or calls, and choosing an appropriate strike price and timeframe. Generally speaking, call buyers and put sellers profit when the underlying stock rises in value. Put buyers and call sellers profit when it falls.

Simply put - if the price of the underlying stock is expected to go up in value, then you BUY CALL options. Conversely, if the price is expected to go down, then you BUY PUT options. This way, you can buy or sell the underlying stock at a fixed price even if its price goes up or down using a stock trading app.

How much money do you need to sell puts? For each put contract you sell, you need enough cash to purchase 100 shares of the stock at the strike price. If you sold 1 contract of a stock at the $50 strike, you need $5,000 in cash available.

Generally, a trader buys a call if they're bullish and buys a put if they're bearish. However, selling a call is usually a bearish strategy, and selling a put is usually a bullish strategy.

Short straddles are when traders sell a call option and a put option at the same strike and expiration price on the same underlying issue. A short straddle profits from an underlying lack of volatility in the asset's price. They are generally used by advanced traders to bide time.

Selling put options: If an investor has “sold to open” a put option position and the stock price has not fallen below the option's strike price, they can “sell to close” the position by buying back the option at a lower price or letting it expire worthless.