Buying Puts

Buying Puts? No need to fear! 


Buying puts:
By buying a put option, the buyer can sell units of stock at the set strike price, when the current market value of the stock is lower than the strike price at or before expiration. 

What does this mean?

When buying or selling any option there are three key elements: premiums, strike prices, and expirations-- this holds true for buying puts, just as it did for buying calls. When buying a call option the buyer must pay a premium, or a small fee, to the seller. This validates the options agreement between the two parties of the options contract. The buyer sets both a strike price and expiration, and is matched with a seller in the market who has set the same values for his/her transaction. The strike price, in the instance of the buying a call, is the maximum amount of money the buyer is willing to spend when purchasing units of stock. The expiration date, set by the buyer, is the period  in which the contractual agreement between the buyer and the seller is upheld. (Fix...)


By paying a premium fee to the seller, the buyer of the call may sell the units of stock to the seller, if the price of the stock reaches or exceeds the set strike price within the time period/before expiration.

The probability of success with options is determined by the movement of the stock. For buying puts, if the stock's price...

• Increases above strike price= The buyer incurs a loss of the decaying option price as well as the premium paid for the option. 
• Stays the same= The time value, or theta, of the option's premium decays over the passage of time.  As the contract approaches expiration, the time value portion of the stock decreases. This is a not beneficial to the buyer of the put option.
• Decreases to strike price- option premium= You break even! OR Decreases below break even price= You profit!

In summary, a buyer of a put option is profitable in 1/3 cases, causing them to have a 2/3 chance of losing, as the stock price could either stay the same or increase. On the bright side, the max loss the buyer will incur is the premium paid for the put option.