How do put options work in the stock market?

Question

A friend told me there is a HUGE number of October 6th put options for the big indexes. What does this mean exactly?

Answer 1

Well, that might have been late last week, but I think that as the week started, that we're not so off kilter anymore, but I'd have to check.

To answer your question, you first need to know that a put option is the right to sell something at a predetermined price (the lower the price of the stock or index goes, the more your put option is worth since no matter how much it keeps falling, you still can sell that item at a predetermined price).


Next, as you may know, the DOW has been flirting with, but unable to topple their all time high for a few days now. This can be viewed as negative in the very short term.

Since many institutions hold hundreds of positions, it would not be feasible to sell off their positions without really depressing the market. Further, it would take time, commissions, and be rather messy.

So instead, many fund managers will buy put options on the indexes and that way if the market pulls back, they have a hedge against their portfolios. (As price goes down, their option price goes up).

Option prices are primarily based on intrinsic (real) value and time value (time and volatility), the less time you buy, the less the cost.

The reason for the Oct 6, options is that they now have weekly options and since the move is expected to take place this week, you buy the weekly options, so you don't pay for more time than you need! Pretty cool eh? :-)

Hope that helps!

Answer 2

As bookbyte said, a put gives the holder the right to sell an underlying security (could be a stock or an index or even pork bellies). If the underlying security does in fact fall, the value of the put rises, making the holder a profit. Furthermore, a 'bet' on the market using puts means you get huge 'leverage', or big return for a relatively small dollar investment. But you also have the risk that you entire dollar investment in the put will be worth zero if you are wrong.

When lots of folks have purchased puts this means that many in the market have a bearish view (they think prices are going to decline.) But historically, whenever put buying swells to really high levels, it means that the folks buying them are probably wrong and in fact the market is ready to rise. Incidentally, I don't think the "put-call" ratio is actually at a high level. I recall seeing that it's in more neutral territory right now, meaning there isn't strong conviction one way or another.

Answer 3

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Answer 4

Puts are the right to sell at a specific price in the future.
A high number of puts, especially out of the money puts indicate a bearish sentiment (people that buy puts think the market is going down).
Since the indexes are reaching new highs, and have been moving up for weeks, many traders think the market is due for a rest and a retracement.

Some traders use this a bearish indicator, other consider it contrarian, and consider it bullish.

Answer 5

Put options are contracts that lets you sell securities at a particular price before a certain expiration date.

You buy put options on stocks/indexes when you think the stock/index will go down.

Your friend meant to say that alot of ppl thinks the index will go down sharply in Oct.

Answer 6

what it means is that they are betting the market will fall. Oct 6 does not have any bearing I do not believe. Options expire on the last friday of the month, I think. October is always a scary month. There was Oct 1929 and Oct 1987. Both left a lasting impression on investors.

It also may be the result of people hedging their portfolios. A common practice. Like buying insurance.

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