When you purchase a PUT option, you have……
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The right (but not the obligation) to sell
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A fixed number of shares at a fixed price (strike price)
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On or before a fixed date (expiry date)
You would buy put options when the market is falling, as they give you the right to sell shares.
The strike price is a fixed, pre determined price at which you can sell the shares if you choose to exercise your right to do so.
As the buyer of an option, you can exercise your right at any time before the set expiry date.
Australian stock options expire on the last Thursday of every month. *This may vary over public holiday periods.
Each stock has set strike prices for trading. Depending on where the strike price is in relation to the current share price, influences the amount you pay, or the premium.
So how do you profit from Put Options?
The value of a put option increases as the share price falls. As an options trader, you would buy put options in a falling market, and onsell them for a profit. You can do this anytime up until that option’s expiry date.
Another clever use of options is for insurance over shares you own. Just as you would insure your house or car, by insuring your shares (hedging), you are protecting your investment should the market fall or suddenly crash.
For example, lets say you paid $ 20 for a share and you bought a put option with the same strike price. If the share price suddenly fell to $ 12 you could exercise your right to sell those shares for $ 20 without incurring any losses.
To your success
Jules Dawson
