Put options

Put options give the buyer the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time. This is the opposite of a call option, which gives the holder the right to buy shares.

If you choose to buy or go long a put option, you are purchasing the right to sell the underlying instrument at whatever strike price you choose until the expiration date. A long put can be an ideal tool for an investor who wishes to participate profitably from a downward price move in the underlying stock. Whenever you buy long puts, your risk is limited to the premium paid for the options. You will maximize your gains if the stock price falls to zero because then your options possess a lot of intrinsic value that may be redeemed once you sell. As long as you buy puts, your risk-taking is protected.

If you choose to sell or go short a put option, you are selling the right to sell the underlying stock at a particular strike price to an option holder. Short put options is generally used when you expect the share price to remain steady or increase slightly over the life of the option. In the event that it falls selling put options is a means of buying stock and being paid a premium to do so. The written put can provide you with extra income in flat to rising markets. If the share price at expiry is above the strike price of the option, the option should expire worthless, and you have benefited from the premium income. If the share price at expiry is below the strike price of the option, the option will be exercised, and you will have to buy shares. Your effective purchase price is the strike price of the option less the premium you received for writing the put.

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