How Do You Buy Put Options
"In short, options contracts allow you to profit from renting stock without actually owning the shares," said Cassandra Cummings, a registered investment advisor and founder of the Stocks & Stilettos Society.
how do you buy put options
When an option is purchased, the buyer pays what's called a premium. The premium is the maximum amount that the option buyer can lose in a trade. This is because options have an expiration date. If the put is not traded or exercised by the expiration date the contract will become worthless. Put options are available for stocks, ETFs, silver, and more.
Put options become more valuable as the underlying stock's price falls and loses value when the stock's price rises. Generally, the value of a put option can also decrease as it approaches the expiration date. This is known as time decay; to minimize this Cummings suggests purchasing contracts that go out at least 45-60 days.
If the ABC company's stock drops to $80 then you could exercise the option and sell 100 shares at $100 per share resulting in a total profit of $1,500. Broken out, that is the $20 profit minus the $5 premium paid for the option, multiplied by 100 shares.If you do not own 100 shares of the stock, you could choose to sell the option contract to another buyer; this practice is known more simply as options trading.
Think of put options and call options as two sides of the same coin with their respective characteristics essentially inverted. If an investor feels a stock will rise, they may purchase a call option. If they feel the price will fall they may choose a put option. One common refrain to help you remember this is "call up and put down."
Put options are a bit more complex than simply buying and selling stocks or index funds. In most cases, brokerage firms require that investors apply and be approved to buy options. Depending on the brokerage firm, you'll need to complete a questionnaire to gauge your experience and risk tolerance.
Put options can be a good way to protect against downside risk if the market falls but they also come with added risks and complexity. Unlike trading a stock, trading a put option requires the investor to be right on three levels: the underlying asset, the direction, and the timing since all options contracts have an expiration date.
A put option is an option contract that gives the buyer the right, but not the obligation, to sell the underlying security at a specified price (also known as strike price) before or at a predetermined expiration date. It is one of the two main types of options, the other type being a call option. Put options are traded on various underlying assets such as stocks, currencies, and commodities. They protect against the decline in the price of such assets below a specific price.
Investors buy put options as a type of insurance to protect other investments. They may buy enough puts to cover their holdings of the underlying asset. Then, if there is a depreciation in the price of the underlying asset, the investor can sell their holdings at the strike price. Put buyers make a profit by essentially holding a short-selling position.
Instead of buying options, investors can also engage in the business of selling the options for a profit. Put sellers sell options with the hope that they lose value so that they can benefit from the premiums received for the option. Once puts have been sold to a buyer, the seller has the obligation to buy the underlying stock or asset at the strike price if the option is exercised. The stock price must remain the same or increase above the strike price for the put seller to make a profit.
The protective put is a powerful hedging options strategy that may help you feel a little more comfortable with market volatility knowing your stock is protected. However, do keep in mind that the security does come at a cost since you pay a premium to own the put.
Important Note: Options involve risk and are not suitable for all investors. For more information, please read the Characteristics and Risks of Standardized Options before you begin trading options. Also, there are specific risks associated with covered call writing including the risk that the underlying stock could be sold at the exercise price when the current market value is greater than the exercise price the call writer will receive. Moreover, there are specific risks associated with trading spreads including substantial commissions, fees, and charges because it involves at least twice the number of contracts as a long or short position and because spreads are almost invariably closed out prior to expiration. Because of the importance of tax considerations to all options transactions, the investor considering options should consult his/her tax adviser as to how taxes affect the outcome of each options strategy. Options investors may lose the entire amount of their investment in a relatively short period of time.
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$0.00 commission applies to online U.S. equity trades, exchange-traded funds (ETFs), and options (+ $0.65 per contract fee) in a Fidelity retail account only for Fidelity Brokerage Services LLC retail clients. Sell orders are subject to an activity assessment fee (from $0.01 to $0.03 per $1,000 of principal). There is an Options Regulatory Fee that applies to both option buy and sell transactions. The fee is subject to change. Other exclusions and conditions may apply. See Fidelity.com/commissions for details. Employee equity compensation transactions and accounts managed by advisors or intermediaries through Fidelity Institutional are subject to different commission schedules.
Options trading entails significant risk and is not appropriate for all investors. Certain complex options strategies carry additional risk. Before trading options, please read Characteristics and Risks of Standardized Options. Supporting documentation for any claims, if applicable, will be furnished upon request.
When establishing a covered call position, most investors sell options with a strike price that is at-the-money (or ATM, meaning the option's strike price is the same as the stock's current market price) or slightly out-of-the-money (or OTM, meaning the strike price is above the stock's current market price). If you write an OTM or ATM covered call and the stock remains flat or declines in value, you're hoping the option eventually expire worthless, and you get to keep the premium you received without further obligation.
That said, if the stock rises significantly, leaving the options deep in-the-money (or ITM, meaning the stock's market price is above the option's strike price), the stock investment on its own would have been better.
The trade-off is that you would effectively cap your potential profit if the share price rose significantly above the strike price. For this trade, that would mean a maximum profit of $5,000, representing the sum of your capital gain from the stock appreciating up to the $75 strike price and your premium from the covered call (that is: $3 x 1,000 shares of stock + $2 x 10 options contracts x 100 options multiplier). In that sense, this trade would make sense only if you thought it unlikely the price of XYZ would exceed $77 by the April expiration (representing the sum of your $72 purchase price and your max profit of $5,000). If XYZ did increase above $77, it would have been more profitable not to have written the covered call.
Options carry a high level of risk and are not suitable for all investors. Certain requirements must be met to trade options through Schwab. Please read the Options Disclosure Document titled Characteristics and Risks of Standardized Options before considering any option transaction. Call Schwab at 800-435-4000 for a current copy. Supporting documentation for any claims or statistical information is available upon request. Covered calls provide downside protection only to the extent of the premium received and limit upside potential to the strike price plus premium received.
(Put options can also be used to hedge investments that you already own. You hope the investment will increase in value, but if it loses money instead, you can always sell it for the strike price specified in the option.)
While our examples assume you'll either exercise the option or let it expire, there is a third scenario: You can sell the option on the open market. Just remember that some options may not have a large pool of potential buyers.
Options are a leveraged investment and are not suitable for every investor. Options involve risk, including the possibility that you could lose more money than you invest. Before buying or selling options, you must receive a copy of Characteristics and Risks of Standardized Options issued by OCC. A copy of this booklet is available at theocc.com. It may also be obtained from your broker, any exchange on which options are traded, or by contacting OCC at 125 S. Franklin Street, Suite 1200, Chicago, IL 60606 (888-678-4667 or 888-OPTIONS). The booklet contains information on options issued by OCC. It is intended for educational purposes. No statement in the booklet should be construed as a recommendation to buy or sell a security or to provide investment advice. For further assistance, please call The Options Industry Council (OIC) helpline at 888-OPTIONS or visit optionseducation.org for more information. The OIC can provide you with balanced options education and tools to assist you with your options questions and trading. 041b061a72