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When it comes to investing, you’ll find that put trading, while more inexpensive than trading stocks, is often riskier. Puts and calls make up the options market. Those that write puts, pledge to the purchaser that they’ll buy their stock at a specified price noted in the contract.
A put is a contract between the writer and the purchaser. It states the writer will buy the stock before a specific deadline at a certain price. The writers bet that the stock price won’t fall significantly. The purchasers, however, believe the stock price will drop significantly and they will be able to sell their put for a profit or be able to exercise their right to sell their stock at the strike price. If the stock price does not drop below the strike price before expiration, the writer pockets the whole premium from the sale of the put.
Even though put trading can be risky, it can also be used as a conservative method to protect from losses. Those who are uncertain if a particular stock will be able to maintain its current price after a large run may purchase puts to protect their gains. If the price of the stock continues to move up, they simply offset the wasted money with the increased profit. If the stock turns around and takes a dive, however, they safely lock in the profit with a guaranteed buyer at the specified price.
When you purchase a put and the stock price drops below the strike price by more than the cost of the put before the expiration date, you will be able to sell the put for a profit. You, as the owner of the contract, may instead choose to exercise it and force the writer to buy your stock for the agreed upon strike price.
Some simply trade puts without owning any stock. They purchase a contract without expecting to sell any stock. Let’s say a stock is $90 per share. You might pay $3 for a put contract with a $89 strike. If the stock plunges to $80, you could then sell your put for $9, leaving you with a 200% profit. The opportunity for great reward always comes with great risk. If the strike price is less than the price of the stock when the term of the contract ends, the put has no value and your investment will be wiped out, unlike stocks, which have the chance to recover their lost value over time.
Put options aren’t just for the stock market. They’re also part of the currency market and commodities market. Farmers have used puts to protect their crop prices for a long time. If they believe they’ll have a great yield and other farmers will have the same, they know the price of their harvest won’t be as high as they hope. To receive the best price possible, they hedge their bets by purchasing a put contract on their crops. When the put is exercised, if the price of that crop, such as soybeans, is below the strike price subtracted by the cost of the put, the farmer has made a wise decision.
You’ll find options trading in any market where prices fluctuate. Some use puts to make a profit on their goods or to protect the profit they already have. Others just want to make the money from buying and selling puts. Whatever the purpose, many find put trading to be quite beneficial.
Option trading Now has been put trading for some time.
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