Options Review
So let’s do a review here real quick, options are a way to control stocks. Since we’re talking about put options in this article, we’ll use put options for the examples and definitions.One option, whether it would be a call option or a put option, represents 100 shares of stock. So when you buy one option that costs $1.00, you end up paying $100.00 for the contract. Calls and Puts are traded in terms of contracts. Again, with one option contract representing 100 shares of stocks.
Note: When you trade options online, there will be a transaction fee. Depending on what online broker you use, will determine how much that fee will be.
I typically use the example of $10.00 to open (buy or sell) a position on one option contract and $10.00 to close (buy or sell) the position. And some online brokerages charge $1.00 for each contract after the first contract. So 10 contracts could cost $19.00 for the transaction - $10.00 for the first option contract and $1.00 for the remaining 9 contracts. Thus, $19.00 to open and close 10 options contracts.
The Put Option
What the heck is a Put Option? Let’s buy one Put Option for this example.A put option allows the put buyer to control 100 shares of stock. As the stock goes down in value, the value of the put option goes up, hopefully.
You buy put options just like call options.
Mindset
Why would you want to buy put options? Well, you might want to buy put options to act as insurance against stock you already own.For example, if you own 100 shares of xyz stock and you think the stock might be heading south, in other words going down, you could buy one put option and that would act as insurance against xyz stock when it goes down.
So if xyz stock goes down, the value of your put option goes up. Acting as insurance or a hedge against the 100 shares of xyz stock that you own. Does that make sense?
You might want to keep the 100 shares of xyz stock and that is why you’d be interested in buying a put options.
Yet another reason to buy a put option is to make money on a stock as it goes down in value without owning the stock.
Put Option Example
Recently, the stock symbol PALM for the company Palm, Inc. had some news surrounding it that caused some option traders to purchase put options.So if you look at the options listing at BigCharts, you’ll see that the open interest is huge, 34,000+ for the January 2010 Palm put option with a strike price of $10.00.
Click image for larger view This tells us that some option traders are betting that Palm stock will go down in value sometime before the third Friday in January, 2010. They are hoping that the stock goes down below the $10.00 strike price. That is when the Palm $10.00 put option for January 2010 will actually rise in value and become profitable. I know, weird. A stock loses value and the put option rises in value. But, that’s the options market. :)
That’s it for this article. Again, put options allow you to make money on a stock that is actually losing value. As a stock goes down, the value of the put option goes up.
As trade options online and start to make money with options, always remember the old say, “Pigs get fat and hogs get slaughtered.” You want to be a pig and not a hog. ;)
