Put Option

Beginner’s Put Option Trading Guide

Trading and investing methods and products may lower risk and boost profit. Products include put options. The purpose of put options and their usefulness for trading beginners are covered in this article.

Know Put Options

A put option gives the holder the right but not the obligation to sell an underlying asset at a strike price within a specific term. The asset might be a stock, index, commodity, or currency pair.

Put options often hedge asset price declines. An investor may lock in a selling price even if the asset’s market price plummets by purchasing a put option.

The Put Option Process

Consider Company XYZ’s $50 share. To hedge against market declines, you purchase a three-month put option at $45 strike.

You may exercise the put option and sell your shares for $45, regardless of market price, if Company XYZ falls below $45 within three months. You can reduce losses and profit from share price falls.

No need to execute the put option if Company XYZ remains above $45 or climbs. Your maximum loss is the contract premium (put option purchase cost).

Benefits and Drawbacks

Beginner traders profit from put options:

Put options hedge market losses.
Limitations: Put option premium maximum loss.
If the underlying asset’s price decreases enough, the put option holder may gain from the strike price-market price disparity.

However, put option risks must be understood:

Put option value decreases over time. Thus, if the underlying asset price does not fall much, the put option may lose value.
If the price doesn’t decline by expiration, the put option is worthless.
Conclusion

Put options help novice traders protect their cash and profit from market downturns. Understanding put options and associated risks lets traders use this strategy.

Sources and References:

This article was prepared using the following sources: