How do put options work?

Question

Do I have to own the stock first to buy one?

Answer 1

Puts give you the right, but not the obligation, to sell at a predetermined price, the strike price, for a specific period of time, until the expiration date of the put. You don't need to own the underlying item, stock, pork bellies, whatever, to buy a put. But if you do, the put works as a hedge against a drop in the price in the underlying item. If you don't, you simply make money if the price of whatever you bought a put on falls.

Also, if you have a strong conviction that something is cheap and that you wouldn't mind buying it anyway, you can sell a put short at a strike below the current market and if the price falls, your net cost is the strike price minus the premium you receive for the put. If it doesn't fall, you simply pocket the premium.

Answer 2

Buying a put is done for two reasons.

1> To hedge an existing position (like an insurance policy in case the stock/x goes down).

2> You are betting that a stock/x will go down.

Keep in mind a put has a strike price, and an expiration.

Longer/further out expirations cost more money,
and move/increase/decrease less
(This is called time value versus intrinsic value)


So when you buy a put, not only are you betting on direction, but also by when it'll happen.

And no, you dont need to own any stock, but you have to approved for options, and there are requirements
for that.

Answer 3

In undeniable english, a positioned is the correct to promote a inventory at a collection fee for the duration of a detailed interval of time. I'll make up a few numbers. You feel microsoft is overpriced, so you purchase one million march 30 positioned for $2 hundred. You now have the correct to promote one hundred stocks of microsoft at $30 a proportion every time earlier than expiration in march. (regularly the 3rd friday of the month). If microsoft drops to $26 a proportion, you'll both simply promote the choice, or recreation it. If you recreation it, you promote one hundred stocks at $30 and purchase them again at $26. You preserve the $four hundred change (minus the $2 hundred you paid for the choice to start with).