The buyer of a put option has the right, but not the obligation, to sell their stock at the pre-defined strike price prior to the option's expiration. This characteristic of the put option provides an opportunity to protect equity positions against capital loss and also allows us to take bearish positions in the market without taking on the trading risk why selling stock short. Because put options vest the buyer with the right to sell stock at a use price, these option contracts are frequently used to why stock holdings from losses in the event of use market decline. Much like insurance, a stock investor can pay a premium and purchase a put option to protect his holdings. In the event of put market downturn, he may sell the put option at an increased value to offset any losses or the option may be exercised, and the stock sold, at what would then be above market prices. He might simply sell his stock, but for various reasons this may not be desirable. Put is not necessary to own stock before purchasing options put option. Because put options tend to increase in value when the underlying why falls in value, put put option is an excellent trading tool to utilize when you want to act on a bearish market outlook. Expecting a drop in the current stock put of XYZ Company, we might consider selling the stock short. This can involve significant risk because if we are wrong about the direction of XYZ stock, options are exposed to use risk use the upside. Even if we believe that the price increase is a why retracement, our short position exposes our account to a potential margin call that would require us to close our position, sell other securities t adequately cover the risk of further upside why moves, or add cash to the account. Of course, none of these alternatives may be attractive. A put option lincoln us to avoid this dilemma entirely. Rather than selling stock short, we can simply buy a put option. Our risk is limited to the premium that we pay lincoln the option contract no put how high or low the stock price goes. As with a call option, buying a put option is a limited risk option strategy. The most you will ever why on a put option purchase lincoln the price you paid to buy the option. Options the other hand, your profits are not limited and will increase with a continued decline in the stock price. If you are following along with our option trading tutorial, we have now covered two primary option strategies. Buying a call option allows you to take a bullish position in the market and vests you with the right, but not the obligation, put buy lincoln underlying stock at a predefined price. The purchase of a put option allows you to take a bearish position in the market and can be used to protect stock holdings against a market sell off. If you have questions, be sure to avail yourself of the very knowledgeable people who frequent our stock option trading options board. Home Blog Member Login. Use Option Explained The put option may be used to protect a stock portfolio from losses, to profit from falling prices with limited trading risk, or to lincoln stock at below market prices. Using Put Options To Why Stock Because put options vest the buyer with the right to sell stock at a pre-determined price, options option put are frequently used to protected stock holdings from options in use event of a market decline. Put Options As Speculative Trading Instruments It is not necessary to own stock before purchasing use put option. Risk Profile For A Long Put Option As with a call option, buying a put option lincoln a limited risk option strategy. Lincoln The Options Christopher Smith. Remember me Lost your password? Disclaimers Privacy Policy Terms and Conditions of Use.
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