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A Put Option is the right to sell a quantity of a given asset or commodity for the specified Strike Price before the Expiration date of the option contract. Buyers of puts expect the price of the Underlying security to fall or stay below the Strike Price so they can sell it for more than the market value and earn a profit from the difference. Put buyers are referred to as going Long of puts. In addition to buying puts, put writers can sell put Options, this is known as going Short.

Buyers of Put Options are sometimes referred to as being Bearish about the prospects for the security or commodity. Conversely, Sellers of Put Options are Bullish about its prospects in the future. Note that due to the ability to both buy and sell Put Options, it is possible to be either Bullish or Bearish when trading Puts.

The opposite position to puts are calls. The owner of a Call Option expects the price of the asset or commodity to rise. It is possible to be both Bullish and Bearish about calls as well as puts.

Long Put Diagram


Example

XYZ is currently trading at $100

Long 1 x At The Money $100 Put Option for 5.0 = $500

Net debit to enter trade = 5

At expiration XYZ is trading at $90

Long 1 x At The Money $100 Put Option is now worth 10.0 = $1000
Net profit = $500 ($1000 - $500)

At expiration XYZ is trading at $110

Long 1 x At The Money $100 Put Option expires worthless = $0
Net loss = (-$500)

At expiration XYZ is still trading at $100

Long 1 x At The Money $100 Put Option expires worthless = $0
Net loss = (-$500)

At expiration XYZ is trading at $95

Long 1 x At The Money $100 Put Option is worth 5 = $500
Break even: $500 to enter, option is worth $500 at Expiration.
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Contributed by: Ralph Windsor

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How To Buy A Put Option

Video Tutorial on How To Buy A Put Option