Making money on a "put option"?

Question

I understand how to make money with a call option...the stock goes up so the option is worth more...but could someone explain in "idiot proof" language how you'd buy an option at $X price and the stock goes down....the option is worth less....how does that make you money? My husband is getting into options and although I trust him completely....I don't understand this and he explains it in terms that I don't "get"...any help would be appreciated.

Answer 1

Bed Bath & Beyond (BBBY) is on a decline right now. The recent price is $40+change. Looking at the February options, we see a trend: Calls at $40 are between $1.45 ($145 bid, an offer to buy the option contract) and $155 ($155 offer to sell, blocks of 100 shares remember), and Puts at $0.40 ($40 bid) and $0.50 ($50 offer); Calls at $35 are between $6 ($600 bid) and $6.10 ($610 asking), and Puts are between $0.05 ($5 bid) and $0.10 ($10 asking); Calls at $45 are matched at $0.05 ($5) and Puts are at $4 ($400 bid) and $4.20 ($420 asking). The market is saying that if you are buying the stock at $35, while the actual value of the stock is $40, they will pay an extra $100 premium for the right to do so--some people think it will go back up. The market is also saying that if you are expecting to place the stock for sale at $45, while the value of the stock is $40, they will pay an extra $400 premium for the right to do so--some people think it will go up, but aren't as confident. If the price rises, the $45 Call option will get more valuable and the $45 Put option will be less valuable. If the price falls, the $35 Call option becomes less valuable and the $35 Put becomes more.

It is complicated, and more than a little weird, so don't feel bad. On the current day's business, some 12,636 February call options for BBBY were traded at the moment I looked, and 1,605 Put options. Even options traders have problems with Puts (a warning sign if your husband doesn't have much experience with Puts). I hope that helps.

Answer 2

A put option is the other side of a call option trade.

A PUT option, agrees to sell a stock you own, for a certain price, for a certain time. The person who "writes" the CALL in effect pays The person who "writes" the PUT, a fee for this right on the stock. If the stock stays the same in price, or goes down, the Call option will not be excercised and the Put writer keeps the fee and the stock. If the price goes up, the Call option is excercised, The Put writer gets the price agreed ahead of time for the stock and keeps the option fee

Answer 3

A "put option" is the polar opposite of a call option. You make money on a call option by being able to "call" or buy it when the price is higher that the call price. A put option allows you to sell the stock (put it in the market). You make money by selling the stock at the put price and buying in back at the current price, which is lower. In either case the profit is the spread between the call or put price and the actual price. Calls are used when you think the stock will go up, puts when you think it will go down.