Options - Put Options?

Question

So i understand what options are, but i dont know how you can possibly make money off of put options. I understand how you can make a profit off of call options, but making money off of put options is very hard to understand. I see "beating around the bush" answers for this question everywhere. They'll give you a perfect description and thorough example of call options and then they'll give you a very crappy explanation and example of put options. It seems like everyone who explains options and are supposedly geniuses of the options world dont' even know what the hell they are talking about when it comes to Put options.

So my question is this: How can you possibly make money off of put options when they are only in the money when the underlying stock's price falls below the strike price?

This is to MVD34, well ok they use options to hedge risk, so they buy the put because they believe that the stock is gonna go down in price, then they sell it at expiration when it does , then they have the the amount that they paid for it back and no stock, then when they believ that it has hit rock bottom they buy it again becasue they believ that it will go up again. Is that correct?
Now about point 2, you say that it is the buy side of the option when actually the holder is the one who is buying the put option and the seller of the put option is the writer. When you sell the option when the stocks price is below your strike price you cant realize a profit because you're not making any money, you're just selling the stock at the strike price you bought it for and therefore have no gain. So im gonna need a better explanation than that.
Ill put it in a simpler format:
1.buy a put for 100 shares at $10 ($1000) 2.sell the shares for the strike price ($1000 in total) 1000-1000= $0

Answer 1

Options, both calls and puts, are a "zero sum" investment. For every dollar the buyer of an option makes on the option, the seller of the option loses a dollar. For every dollar the buyer of an option loses on the option, the seller of the option makes a dollar.

However, many people who trade options hedge their positions, allowing both the buyer and the seller to have profitable positions. A simple example of this is a covered call on a stock that goes up in price. Suppose I buy a stock for $50 per share and sell a call with a strike price of $55 for $2. Now assume at expiration the stock is selling at $60 per share and I am assigned. I sell the stock for an effective price of $57 per share, or a profit of $7 per share. The buyer of the option buys the stock for an effective price of $57 per share, them sells them on the open market for $60 per share, or a profit of $3 per share.

Put options can be hedged as well, either with other options positions or with stock positions.

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In your example to MVD34 you picked an entirely unrealistic example:

"buy a put for 100 shares at $10 ($1000) 2.sell the shares for the strike price ($1000 in total) 1000-1000= $0"

No one would ever pay $10 per share for a put option with a $10 strike price.

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Here are some example of possible put option trades that would make money:

(1) Unhedged buy

Buy an option with a $10 strike price for $2 per share. At expiration the stock is trading at $5 per share. Buy the stock on the open market for $5 per share and exercise the option, selling the stock for $10 per share, getting a $5 per share return on a $2 investment.

(2) Unhedged sale

Sell an option with a $10 strike price for $2 per share. At expiration the stock is trading at $15 per share. The option expires worthless. The entire $2 per share premium received when the option was sold is kept at a profit.

Bearish Diagonal Put Spread:

http://messages.yahoo.com/Business_%26_Finance/Investments/threadview?bn=4686677%23optiontradestraderecommendations&tid=3274&mid=3274

Winged Spread

http://messages.yahoo.com/Business_%26_Finance/Investments/threadview?m=tm&bn=4686677%23optiontradestraderecommendations&tid=2752&mid=2752&tof=117&frt=1

Answer 2

In plain english, a put is the right to sell a stock at a set price during a certain period of time. I'll make up some numbers. You think microsoft is overpriced, so you buy 1 march 30 put for $200. You now have the right to sell 100 shares of microsoft at $30 a share anytime before expiration in march. (always the third friday of the month). If microsoft drops to $26 a share, you can either just sell the option, or exercise it. If you exercise it, you sell 100 shares at $30 and buy them back at $26. You keep the $400 difference (minus the $200 you paid for the option to begin with).

Answer 3

If you buy a put option on a stock, the lower the stock price goes the more valuable the put option will be. So you can sell the put before expiration and make money.

You can also sell a put option and receive money. If the price rises, then the put becomes worthless and you keep the money.

That's how you make money with put options.

Answer 4

When APPL, GOOG, RIMM, VMW, RIO, CHL have dipped, either themselves or with the market, I buy call options >3months out which for me equalizes the risk to buying the stock itself, and when they go up I make a lot more money then I would have if I had bought the stocks. When they and/or the market is trending higher then normal, I buy put options, again > 3 months out on them and I make a lot of money on them when the stock price goes down.

MVD34 I'm curious why you don't employ this method or do you think it's too risky for the amounts you're investing?
Although, I will say I do employ your hedging method with the big funds I have, by buying DOG/DUG/SDS/QID when for example mkt gets way overextended above their 50 DMAs like in Aug and Oct this year.

Answer 5

You're not very smart are you? Do you really think that put options would continue trading if it was impossible to make money trading them?

Scenario 1. Stock at $50, you buy a $45 put for $2. Stock goes to $45 and put option goes up to $4. You sell put. You've made $2 ($4-$2) per option.

Scenario 2. Stock at $50, you buy a $45 put for $2. Stock goes to $30 and instead of selling the option for $15 you exercise your option. You're short stock at the equivalent of $43 ($45-$2). You buy the stock at $30. You've made $13 per option.

Answer 6

The secret word of trading success is "organized". You can't be successful without a strategy, a plan and some kind of technological support. I use a software called "autobinary signals" that is helping me a lot. There are plenty of them on the market. I recommend this one because it's very easy to use (you don't have to be an expert or have special skills to make money with it).

Check it out here. It's worth it: http://www.goobypls.com/r/rd.asp?gid=551
Have a nice day

Answer 7

Point one: put options are used by knowledgeable investors most often to cover risk (HEDGE) not to make money in your context -- they make money by avoiding loss. This is the way I use options.

Point two: Put options go in the money when a stock value falls. So you make money either by selling the option itself at a profit or by exercising the option and forcing the holder to pay you the higher (exercise) price.

This is the buy side of put options -- is that what you were asking?

Follow up
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I say "buy side" because I am almost always "making money" as a buyer of options who has the RIGHT but not the obligation to exercise the option. On the "sell side" someone creates the option by selling the right and keeping the OBLIGATION to exercise. From your follow up, it sounds like you are asking about people like me on the "buy side."

So....

First, about 2 times out of 3 I do NOT make money on put options...I buy them and I sell the option itself at a loss or I allow it to expire worthless on the third Friday of the month.

If I can price it right (which is NOT a given), I loose about 30% of the purchase price of option....I am paying a small price (the cost of my option) to cover myself from a huge loss to my portfolio.

Second, 1/3 my hedging pays out. I'll use a (modified) actual example to show you the math.

I am a long time owner of AINV (do not run out & buy it). This summer it got "overheated" in my opinion and ran up to 52wk highs in the $23/share range. In June 2007 I purchased put options (QPPXE) that give me the right to sell AINV at $25/share anytime before 12/14/07 for $2.85 each. I was hedging my "overheated" stock -- trying to lock in the gain without selling my stock. I still do not want to sell my AINV even though it is currently selling for $18/share, so I sold my options this week for $7.40 each leaving me a net profit of $4.50 per option...yes I would have "made" more money by selling my stock outright in June EXCEPT that I want to continue owning the stock and it pays significant dividends. So instead I used options (in a backhanded way) to buy more stock at a lower price (which I am doing this week).

Is this, by itself, a way to the big house? No, as I said I am playing it safe and hedging my bets. It is a way to STAY in the big house.

Make sense?

Answer 8

call selection is a suitable to purchase a inventory at a definite cost. A placed selection is a suitable to sell a inventory at a definite cost. all strategies have an expire date. as quickly as the expire date passes the alternative is expired and valueless. in actuality the way the call selection works, is that in case you purchase an call selection with a stirke cost of say $a hundred. the present inventory is at $80. this function could not be used until eventually finally the cost of the inventory is going over $a hundred. reason there is not any ingredient of procuring for a inventory at $a hundred whilst the cost is in basic terms $80 on the marketplace. yet enable say the cost is going to $one hundred fifty. you are able to now use the alternative, and purchase the inventory at $a hundred even nonetheless the cost of the inventory is $one hundred fifty, and turn suitable around and sell the inventory at $one hundred fifty, profiting $50 for each selection you have. The placed paintings in opposite in that in case you purchase a placed At $80, that supply you the splendid to sell a inventory at $80. if the cost is going down under $80, lets say $60, then you definately could purchase the inventory at $60 excercise your selection and sell the inventory at $80 ,and make $20 off each and each selection. generally the alternative is an extremely low quantity whilst in comparison with the cost fo the inventory. So its a manner of taking little or no money and making a brilliant investment. in spite of the undeniable fact that it is likewise very volatile, in that if the cost doesnt bypass interior the path you desire it to in the previous the expiration date you lose each little thing.

Answer 9

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