The put option gives the buyer the right
Updated Dec 23, What Is a Put? A put is an options contract that gives the owner the right, but not the obligation, to sell a certain amount of the underlying asset, at a set price within a specific time. The buyer of a put option believes that the underlying stock will drop below the exercise price before the expiration date.
Chuck Kowalski Updated March 11, A person would buy a put option if he or she expected the price of the underlying futures contract to move lower. A put option gives the buyer the right, but not the obligation, to sell the underlying futures contract at an agreed-upon price—called the strike price —any time before the contract expires.
Calls are the other type of option. They give the buyer the right to purchase the underlying futures contract before the expiration date.
Finding the Right Put Option to Buy Consider the following things when determining which put option to buy: Duration of time you plan on being in the trade.
Amount you can allocate toward buying the option. Length of move you expect from the market. Most futures exchanges have a the put option gives the buyer the right range of options in different expiration months and different strike prices that enable you pick an option that meets your objectives.
One thing to be aware of is that the time premium of options—their value based on how much time they have left before expiration—decays more rapidly in the last 30 days. Therefore, you could be right on a trade, but the option could lose too much time value and you would end up with a loss regardless.
Therefore, you should always buy an option with 30 more days until expiration than you expect to be in the trade. Amount You Can Afford Depending on your account size and risk tolerance, some options may be too expensive for you to buy.
In-the-money put options will be more expensive than out-of-the-money options. And the more time that remains before the expiration date, the more the options will cost.
Unlike with futures contractsthere is no margin when you buy futures options; you have to pay the whole option premium upfront. Therefore, options on volatile markets like crude oil futures can cost several thousand dollars. That may not be suitable for all options traders. Most deep out-of-the-money options will expire as worthless, and they are considered long shots.
To maximize your leverage and control your risk, you should have an idea of what type of move you expect from the commodity or futures market. The more conservative approach is usually to buy in-the-money options.
A more aggressive approach is to buy multiple contracts of out-of-the-money options.
Put options: Learn the basics of buying and selling
Your returns will increase with multiple contracts of out-of-the-money options if the market makes a large move lower. Put Options vs. With a futures contract, you have virtually unlimited loss potential.
Put options also do not move in value as quickly as futures contracts unless they are deep in the money. That lower volatility allows a commodity trader to ride out many of the ups and downs in the markets that might force a trader to close a futures contract to limit risk.
One of the major drawbacks to buying options is the fact that options lose time value every day. Options are a wasting asset—they're theoretically worth less each day that passes.
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