What Is Put Option?
What is put option? A simple answer to this question is that the buyer of the put option holds the right to sell his stocks at the agreed strike price before the expiration and it is obligatory for the seller to buy the stocks if buyer decides to do so. Or in simple words we can say that put options are stock options that give its holder the power but not obligation to sell his stocks at a fixed price before the fixed expiration date.
Put option enables you to sell the stock at a fixed price no matter how low will be the price in future. It is a risk limited option of trading and you can easily gain profit from this type of trading. Put option allows the investors to gain profit from a downturn in stocks without taking any kind of risk.
When to Trade in Put Option
As put options are a sort of financial contract between the buyer and the seller, and the seller gives the buyer rights to sell him the stocks at a fixed price as agreed in the contract. The buyer can hold on to the stocks until the contract expires and in the meanwhile if the stock’s price drops he can either sell the put options to another buyer at a higher price or buy the stocks at cheap market price and then afterwards when he sells the stocks to the seller he gains profit due to higher agreed price.
So, from seller’s point of view he expects the stocks to stay stagnant or go up so that he is able to make profit out of that sale and from buyer’s point of view he expects the stocks go down. But both buyers or holders and sellers or writers of the put option should be aware of the fact that the speculation they make about the stock prices to go up and down can sometimes not come true due to expiration of the contract so must think before taking the risk.
Hence, the price of put options depends upon intrinsic value which is the amount of profits already built in the put options and extrinsic value which is the amount you pay to own the put options contract as compensation to the seller or taking risk. So, when to trade in put option really depends upon the contract period between buyer and seller and the current market prices.
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