Option is used for, What is a put option and how is it used in practice?
The trader expects the stock to correct significantly in the current series and purchases a put option of strike price Rs90 by paying a premium of Rs10 time value.
Through this example, we see how a trader can play on the bearishness of a stock by purchasing put options. Scenario 2: Forget price, just play on volatility Let us say you are not sure if the price of NBFC B in the above illustration will go down. In this case, you can play the higher volatility with options.
Higher volatility is positive for the value of put options in fact for all options. Assuming that the price of NBFC B does not move in the above case, but the volatility does go up sharply, the price of the put option can still rise and result in profits. The unique thing about a put option is option is used for it benefits from volatility.
This is where put options fit in with volatility. Let us assume that an investor had bought the stock at Rs and is sitting on tidy profits. He wants to play the small corrections in the stock but does not want to close his position in cash.
Options on Futures: Value of an Option (Moneyness)
Currently, the market price is Rs1, and the 1, put option is available at Rs9. He can buy this put option; if the price of RIL comes down, he can book profits in the put option.
Effectively, he keeps monetizing part of his profits on a regular basis. Scenario 4: Hedging your downside risk This is, by far, the most important reason why traders and even investors use put options.
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- The strike price may be set by reference to the spot price market price of the underlying security or commodity on the day an option is taken out, or it may be fixed at a discount or at a premium.
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The stock price of SBI is currently at Rs and you just bought 3, shares lot size.