
A put option gives you the right to sell a stock at a certain price (the strike price) at during a certain period (an American style option) or on a set date (the Expiration Date and a European style option).
As discussed before, you could buy the put At the Money (the price the stock is selling for at that moment), In the Money (a price above where the stock is selling right now) or Out of the Money (a price below where the stock is selling right now). The more bearish you are, the lower the strike price you should use (and the lower your premium will be.)
You make money if the price of the stock falls by more than your premium. You lose money if the stock falls less than your premium or gains in price.
Your maximum profit is if the stock goes to zero, so the maximum profit is the price of the stock when you bought it minus the premium you paid. The maximum you can lose is your premium.
You would never have to post margin on this type of an option purchase.
So, if you are very bearish on a stock, you could buy a put to express that view.







Larry, the last time I asked a question, you were kind enough to answer thoughtfully. Dare I tempt fate again?
I have some friends who recently described their troubles with their "stock portfolio." Half way through the conversation, they admitted that they had lost "a lot" of money trading options. They really hadn't been investing in stocks at all. How would you tell people to decide whether or not options or other riskier strategies are appropriate for their personal risk tolerance?
Posted by: Devin Thorpe | February 2, 2006 10:54 PM | Permalink to Comment