What to Consider When Buying Put Options in Stock Trading
When you buy a put option, you’re hoping that the price of the underlying stock falls. You make money with puts when the price of the option rises, or when you exercise the option to buy the stock at a price that’s below the strike price and then sell the stock in the open market, pocketing the difference. By buying a put option, you limit your risk of a loss to the premium that you paid for the put.
If, for example, you bought an ABC December 50 put, and ABC falls to $40 per share, you can make money either by selling a put option that rises in price or by buying the stock at $40 on the open market and then exercising the option, thus selling your $40 stock to the writer for $50 per share, which is what owning the put gave you the right to do.
Put options are used either as pure speculative vehicles or as protection against the potential for stock prices to fall. When you buy a put option, you are accomplishing essentially the same thing as short selling without some of the more complicated details. Put options also give you leverage because you don’t have to spend as much money as you would trying to short-sell a stock.
Out-of-the-money puts are riskier but offer greater reward potential than in-the-money puts. The flip side is that if a stock falls a relatively small amount, you’re likely to make more money from your put if you own an in-the-money option.
In contrast to call options, you may be able to buy a longer-term put option for a fairly good price. Doing so is a good idea, because it gives you more time for the stock to fall. Buying the longer-term put also protects you if the stock rises, because its premium will likely drop less in price.