Buy put options explained windows


Buy put options explained windows


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A:The incorporation of options into all types of investment strategies has quickly grown in popularity among individual investors. For beginner traders, one of the main questions that arises is why traders would wish to sell options rather than to buy them. Options are contracts that give option buyers the right to purchase or sell a security at a predetermined price on or before a specified day.

They are most commonly used in the stock market but are also found in futures, commodity and forex markets. Protective Put ConstructionLong 100 SharesBuy 1 ATM PutA protective put strategy is usually employed when the options trader is still bullish on a stock he already owns but wary of uncertainties in the near term. It is used as a means to protect unrealized gains on shares from a previous purchase.

Unlimited Profit PotentialThere is no limit to the maximum profit attainable using this strategy. The most you can make by buying (being long the put) is the strike price less the premium. You may have bought for any number of reasons: to speculate on a downward movement, to insure a long position, or to hedge an option written at a higher strike (vertical spread), or to hedge an option written at a different date (calendar spread).On the sell side, you may be using your cash to generate income.

You may be desiring to go long the underlying but only under a price you deem fair. BTW, the answers for call options will be similar due to put-call parity. A short put option strategy is one of the most basic building blocks to income generation with your portfolio. When you sell a put option you are taking the obligation to buy shares of the underlying stock at the strike price.Generally you will sell a put option below the current market price for that stock (far OTM). Meaning, that if the stock drops below your strike price you will be required to buy the stock at the strike price, even if it is higher than the current market value.However if the stock never drops below your strike price, the option will expire worthless and you will keep the entire credit you received.




Buy put options explained windows

Buy put options explained windows

Buy put options explained windows



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