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Read the notification here. In case of any queries, start instant Chat with our Customer Service team or WhatsApp 'Hi' on or email us at kscustomer. Benefits: i. Effective Communication ii. Speedy redressal of the grievances. Telephone No. No 21, Opp. Telephone No: Skip to main content. Account Login Not Logged In. Chapter 2. What are Put Options: In any market, there cannot be a buyer without there being a seller.
Here are some key features of the put option:. Buying put options : Whether you are a buyer or a seller, you have to pay an initial margin as well as an exposure margin.
Selling put options: As a seller or writer of a put option, your potential loss is unlimited. Squaring off:. Physical settlement:. For a buyer of a Put Option: :. For the seller of a Put Option:. Previous Chapter Next Chapter. Trading Demos. Why Capital gains report? Time value, or extrinsic value, is reflected in the premium of the option. Different put options on the same underlying asset may be combined to form put spreads.
There are several factors to keep in mind when it comes to selling put options. The payoff of a put option at expiration is depicted in the image below:. Put options, as well as many other types of options, are traded through brokerages. Some brokers have specialized features and benefits for options traders.
For those who have an interest in options trading, there are many brokers that specialize in options trading. The buyer of a put option does not need to hold an option until expiration.
As the underlying stock price moves, the premium of the option will change to reflect the recent underlying price movements. The option buyer can sell their option and either minimize loss or realize a profit, depending on how the price of the option has changed since they bought it. Similarly, the option writer can do the same thing. If the underlying price is above the strike price, they may do nothing.
This is because the option may expire at no value, and this allows them to keep the whole premium. But if the underlying price is approaching or dropping below the strike price, then to avoid a big loss, the option writer may simply buy the option back which gets them out of the position.
The profit or loss is the difference between the premium collected and the premium paid to get out of the position. The exact price for the put would depend on a number of factors, the most important of which is the time remaining to expiration. We consider two cases: i the investor already holds units of SPY; and ii the investor does not hold any SPY units.
The calculations below ignore commission costs, to keep things simple. The net profit on this trade can be calculated as:. What if the investor did not own the SPY units, and the put option was purchased purely as a speculative trade?
Exercising the option, short selling the shares and then buying them back sounds like a fairly complicated endeavor, not to mention added costs in the form of commissions since there are multiple transactions and margin interest for the short sale. The profit calculation in this case is:.
Why the difference? Thus, most long option positions that have value prior to expiration are sold rather than exercised. For a put option buyer, the maximum loss on the option position is limited to the premium paid for the put. The maximum gain on the option position would occur if the underlying stock price fell to zero.
The majority of long option positions that have value prior to expiration are closed out by selling rather than exercising , since exercising an option will result in loss of time value, higher transaction costs, and additional margin requirements.
In the previous section, we discussed put options from the perspective of the buyer, or an investor who has a long put position. Investors can sell options to generate income, and this can be a reasonable strategy in moderation. Especially in a rising market, where the stock is not likely to be put to the seller, selling puts can be attractive to produce incremental returns. Realize more attractive buy prices. Investors use put options to achieve better buy prices on their stocks.
If the stock remains above the strike, they can keep the premium and try the strategy again. Nerdy tip: The basic question in an options trade is this: What will a stock be worth at some future date? Buying a put option is a bet on "less. What is a put option? Learn More. Promotion None no promotion available at this time. Buying a put option. Buying a put option vs. Selling a put option.
More put option strategies. On a similar note Dive even deeper in Investing. Explore Investing. Get more smart money moves — straight to your inbox. Sign up. The payoff for put sellers is exactly the reverse of those for buyers. Sellers expect the stock to stay flat or rise above the strike price, making the put worthless.
The appeal of selling puts is that you receive cash upfront and may not ever have to buy the stock at the strike price. As a put seller, your gain is capped at the premium you receive upfront. Typically investors keep enough cash, or at least enough margin capacity, in their account to cover the cost of stock, if the stock is put to them. If the stock falls far enough in value you will receive a margin call, requiring you to put more cash in your account.
The other major kind of option is called a call option, and its value increases as the stock price rises. In this sense, calls act the opposite of put options, though they have similar risks and rewards:. For more, see the basics you need to know about call options. But investors can also use options in a way that limits their risk while still allowing for profit on the rise or fall of a stock. MoMo Productions.
How We Make Money. Editorial disclosure. James Royal. Written by. Bankrate senior reporter James F. Royal, Ph. Edited By Brian Beers. Edited by. Brian Beers. Brian Beers is the senior wealth editor at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money.
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