When Trading Options Put Strategies Count!

Put options are rights to sell an underlying asset of a contract. It may be a stock option or commodity option, but the principles are the same. When you buy a put option, you expect that the market price of the underlying stock or commodity is going to fall, so when trading options put strategies are important.

Puts are basically for bear markets. When you buy a put option with stocks as the underlying asset, for example, you have the right to sell 100 shares of the stock at a certain price called a strike price. The right must be exercised though within a certain period or by the exercise date. If the right is not exercised then the option simply expires. If a bear market exists though, there is a good chance you can make some money.

Buying a put is a good strategy if you believe the underlying stock price is going down. That is because you are able to make money when the price of the stock falls lower than the strike price before the expiration date. You do this by exercising your option to sell the stock at the higher price. This is the simplest explanation and there are a number of strategies that can be used that enhance trading opportunities. For example, puts play a role in spread strategies that involve both puts and calls.

Basically a put works like this: You buy a BBB Company January 40 put. This means you have a right to sell 100 shares of BBB Company stock at $40 a share. The market is falling and the stock price for the BBB company falls to $35 a share. Now the option is out of the money because the stock price is lower than the strike price. You now have a couple of choices. You can either sell a put option that has gone up in price. Or you can buy the stock in the marketplace at $35 and then exercise the option to sell the stock at $40.

The put gives you the right to sell the stock at the specified price which in this case was $40. If the market fooled you and stock prices went up and BBB Company stock rose over the strike price, then you would just let your option expire.

When you are buying options put strategies can reap profits or give you some insurance against a falling market. The put works the same way for stock options and options on futures contracts. One put strategy that has been successfully used involves buying out-of-the-money puts. Because the market price is further from the strike price, continued market falling can lead to bigger profits.

When an underlying asset price drops and you own a put option, there are several different strategies you can follow. For example, you could simply exercise the put option and take the profits. You can exercise the put option and then invest it in another out-of-money put. You can implement a spread strategy in order to build on your profit making ability. There are other possible strategies also.

When trading options put holders need to remember that puts are subject to time decay like call options. As the expiration date draws closer, the value of the put declines. It is these kinds of relationships that are so important to understand.