Put option

A put option is an option on. What is an Option? Put and Call Option Explained

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  • Buyer of option pays you amount through brokers and the exchange Helps reduce you loss or increase profit.
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  • Updated Dec 23, What Is a Put?
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  • What Is a Put Option? Examples and How to Trade Them in - TheStreet

What is an Option? An option is a security, just like a stock or bond, and constitutes a binding contract with strictly defined terms and properties.

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For most casual investors, that definition may as well be written in ancient Greek. Put Options and Call Options Perhaps we can explain options a bit more clearly.

Put Option

Then you can either keep the shares which you obtained at a bargain price or sell them for a profit. But what happens if the price of the stock goes down, rather than up? You let the call option expire and your loss is limited to the cost of the premium.

The financial product a derivative is based on is often called the "underlying. What Are Call and Put Options? Options can be defined as contracts that give a buyer the right to buy or sell the underlying asset, or the security on which a derivative contract is based, by a set expiration date at a specific price. Note This specific price is often referred to as the "strike price. A call option is bought if the trader expects the price of the underlying to rise within a certain time frame.

When you hold put options, you want the stock price to drop below the strike price. If it does, the seller of the put will have to buy shares from you at the strike price, which will be higher than the market price.

  • Instrument models[ edit ] The terms for exercising the option's right to sell it differ depending on option style.
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  • Term of exercise of an option
  • This pre-determined price that buyer of the put option can sell at is called the strike price.
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  • Put Option Definition

Because you can force the seller of the option to buy your shares at a price above market value, the put option is like an insurance policy against a put option is an option on shares losing too much value. Purchasing options can give you a hedge against losses, and in that sense, they can be used conservatively.

Jan 9, PM EST TheStreet When the market is volatile, as it has been recently, investors may need to re-evaluate their strategies when picking investments. While buying or holding long stock positions in the market can potentially lead to long-term profits, options are a great way to control a large chunk of shares without having to put up the capital necessary to own shares of bigger stocks - and, can actually help hedge or protect your stock investments.

But there are many options strategies that amount to little more than gambling and can increase your risk to a frightening degree. Remember, when a call is exercised, stock must be delivered by the seller of the call.

If a strong market advance or a major announcement by the issuer has driven the share price up sharply, your losses could be enormous. As indicated, many option strategies involve great complexity and risk.

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For this reason, not all options strategies will be suitable for all investors. In fact, with the exception of sophisticated, high net worth individuals who can afford and are willing to incur substantial losses, the writing of puts or uncovered calls would be unsuitable for just about everyone.

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Nevertheless, brokers sometimes engage in inappropriate options trading on behalf of customers who do not understand the risks. If you have lost assets because your stockbroker was engaging in options trading, please contact us today.

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