DaytradeTeam Brainzzzz
Trading Tips and Strategies from Traders at DaytradeTeam
Monday, August 15, 2005
Put Options--Profit from Decline in Stock Price
Put options are often used in our Options Trading Systems. A put option is an option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time.
In other words, a put option becomes more valuable as the price of the underlying stock goes lower.
Put options are generally used two ways:
#1: A put option can be used to limit downside risk of holding a stock that is owned. For example, if you own 1000 shares of MSFT stock that is currently trading at $27/share, you might want to buy a put option with a strike price of $25.00. This would mean that if MSFT went under $25.00, you would still have the right to sell your shares for $25.00, thus limiting the downside risk.
#2: A put option can be used as a speculative investment, essentially betting that a stock will go down in price. For example, if you believe that AMZN stock is overpriced at $50.00 per share, you might buy a put option with a strike price of $50.00. If AMZN stock price falls, the value of the put option will increase, giving you profit upon selling the put option.
Summary: Put options increase in value as the underlying stock moves lower. Put options can be used to limit the risk of owning a stock, or to attempt to profit on speculation that a stock will fall in price.
In other words, a put option becomes more valuable as the price of the underlying stock goes lower.
Put options are generally used two ways:
#1: A put option can be used to limit downside risk of holding a stock that is owned. For example, if you own 1000 shares of MSFT stock that is currently trading at $27/share, you might want to buy a put option with a strike price of $25.00. This would mean that if MSFT went under $25.00, you would still have the right to sell your shares for $25.00, thus limiting the downside risk.
#2: A put option can be used as a speculative investment, essentially betting that a stock will go down in price. For example, if you believe that AMZN stock is overpriced at $50.00 per share, you might buy a put option with a strike price of $50.00. If AMZN stock price falls, the value of the put option will increase, giving you profit upon selling the put option.
Summary: Put options increase in value as the underlying stock moves lower. Put options can be used to limit the risk of owning a stock, or to attempt to profit on speculation that a stock will fall in price.
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