Website design By BotEap.comPlaces

Website design By BotEap.comBuying a put option on a stock gives the buyer the option (but not the obligation) to sell a specified stock at a specified price until a specified date.

Website design By BotEap.comPut options can be used as insurance against falling stock prices. If you bought some shares in a stock and they went up in price when you bought a put option on the stock at the new price, you have, in effect, locked in the stock’s price increase.

Website design By BotEap.comLay Options

Website design By BotEap.comI think the analogy of buying a house is one of the best ways to explain how an option works, so I’ll use that basic premise here.

Website design By BotEap.comThe cash values ​​are just for simplicity and this will obviously work for different options and stock prices.

Website design By BotEap.comCase Study: Buying a Put Option on a House

Website design By BotEap.comWe have a house that is currently selling for $100,000.

Website design By BotEap.comWe think house prices may fall but we don’t want to sell the house this month, we approached a buyer with a contract (proposal).

Website design By BotEap.comOur Contract states that we will give the buyer $1000 for the option (the right but not the obligation) to sell the house at the list price of $100,000.

Website design By BotEap.comThe contract is good for 30 days and if we do not sell the house within that period, the buyer keeps the $1000 and there is no further commitment from either of us.

Website design By BotEap.comIn fact, we have purchased the equivalent of a month’s put option on the property.

Website design By BotEap.comThe contract is good for 30 days and if we do not sell the house within that period, the buyer keeps the $1000 and there is no further commitment from either of us.

Website design By BotEap.comIn fact, we have purchased the equivalent of a month’s put option on the property.

Website design By BotEap.como If the housing market soars (in the next 30 days) and the house is now valued at $110,000, we let our option expire worthless and we can sell the house for $110,000.

Website design By BotEap.com$110,000 (Present Value) – $1,000 (Option Price) – $100,000 (Initial Price) = $9,000 (Our Earnings).

Website design By BotEap.como If the housing market crashes (in the next 30 days) and the house is now valued at $90,000, we can exercise our option and sell the house for $100,000.

Website design By BotEap.com$100,000 (Sale Price) – $1,000 (Option Price) – $90,000 (Current Value) = $9,000 (Our Locked Value).

Website design By BotEap.comcontract sizes

Website design By BotEap.comOn the Australian Stock Exchange, a standard put contract typically covers a thousand underlying shares (some contracts have odd numbers, so be aware of the number of underlying shares the option contract covers).

Website design By BotEap.comOn the New York Stock Exchange, a standard sales contract typically covers one hundred underlying shares.