Put Options?

Question

So basically buying put options makes no sense as you cannot realize a profit no matter what.

Will somone please explain to me how it is possible? Do you borrow the stocks? What do you do to make money?

Please don't give me the definition of put opions or call options and please dont tell me that they just do make money i want a detaiuled explanation as well as an example. Thanks

Witz1960 You do not know what you are talking about!

Witz is a genius!

Answer 1

See my answer from when you asked this qustion before at

http://answers.yahoo.com/question/index;_ylt=AonEr3eE88NqphNJfkHyphmvxQt.;_ylv=3?qid=20071207145050AAAkOMb

By the way, witz1960 did give you a perfectly good example af making money with an unhedged long put position.

Answer 2

Yes you can make money and here is a real life example: Let's say I want to buy a put option for Walmart. I just looked at Yahoo Finance and it said WMT closed at 49.02 today. If I look at the options link, I see that a put option with a strike price of 47.50 is selling for 0.40 an option (1 contract usually contains 100 options). So you would pay 0.40x100 = $40.00 for these options. Technically you have bought the right to sell 100 shares for 47.50.

Let's assume over the next month WMT stock price drops to $45 a share. Now you can go out on the open market and buy 100 shares of WMT at 45.00x100 = $4,500.00. You can then sell these 100 shares for 47.50x100 = $4,750.00. You just made $250 minus the $40 you originally paid for the put contract.

This is just one scenario and you can gain or lose money dealing in puts and calls, people like them because it takes a relatively small initial investment (in our case $40) to make a better return than you could make buying stocks (that same $40 would only get you 1 share of WMT stock). But it is riskier too because if you've bought a put and WMT stock doesn't drop, you've wasted all your money.

Answer 3

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Answer 4

Put options give you, the owner of the option, the option to SELL at a given STRIKE price.

You win when the stock price goes DOWN.

Example: You buy 2 Put options of ABC with a strike price of $50 for a premium of $.75. Your investment is $150. You now control 200 shares of ABC.

As time passes the stock price drops to $43. You now exercise your option to sell. So in one transaction, you buy 200 shares for $8,600 (200 * $43) and use your option to sell those same shares for $10,000 (200 * $50)

Your profit is $1,250 ($10,000 minus $8,600 minus $150) on your $150 investment.. Pretty darn good.

The other way to make money is to sell the option. As the price drops to $43, the value of the Premium might be $7. You merely sell the option for $1,400 (200 * $7). You still have the same $1,250 profit.

Your downside of course is limited to only the amount of the premium you initially paid - The $150.

Hope this helps

Answer 5

I just gave you an example by editing my answer on your last question.

I had to go look the numbers up, man...geez...will you give a guy enough time to do the grunt work.

:-)