As the underlying stock price moves, the premium of the option will change to reflect the recent underlying price movements. The option buyer can sell their option and either minimize quebex loss or realize a profit, depending on how the price of the option has changed since they bought it. To give you an example, imagine Netflix (NFLX 3.08%) trades at $500 per share.
- The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors.
- This means you can require whoever sold you the put option (known as the writer) to pay you the strike price for the stock at any point before the time expires.
- The investing information provided on this page is for educational purposes only.
- On the flip side, the value of a put option decreases as the underlying stock increases.
Put sellers make a bullish bet on the underlying stock and/or want to generate income. The most significant downside to short selling is that losses can be theoretically infinite if the stock continues to climb. While no stocks have soared to infinity yet, short-sellers could lose more money than they put into their initial position. If the stock price continued to rise, the short-seller might have to put up additional capital in order to maintain the position. Conversely, if the stock remains above the strike price of $50, the option is “out of the money” and becomes worthless.
Buying a put option
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Selling vs. Exercising an Option
So the option value flatlines, capping the investor’s maximum loss at the price paid for the put, of $5 premium per share or $500 in total. If an investor is buying a put option to speculate on a move lower in the underlying asset, the investor is bearish and wants prices to fall. On the other hand, the is etoro safe protective put is used to hedge an existing stock or a portfolio. When establishing a protective put, the investor wants prices to move higher, but is buying puts as a form of insurance should stocks fall instead. If the market falls, the puts increase in value and offset losses from the portfolio.
Alternatives to Exercising a Put Option
Investing involves risk, including the possible loss of principal. The value of a put option appreciates as the price of the underlying stock depreciates relative to the strike price. On the flip side, the value of a put option decreases as the underlying stock increases. A put option’s value also decreases as its expiration date approaches.
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Market Movement
A call option is “in the money” if the market price of the underlying stock rises above the strike price, as exercising the option would allow someone to purchase the stock at a below-market price. Conversely, it’s “out of the money” (worthless) when the market price of the underlying stock is below the strike price. Because one contract represents 100 shares, for every $1 decrease in the stock’s market price below the strike price, the total value of the option increases by $100.
Investors with existing portfolios also use put options to protect their investment as a type of insurance policy. Like trading in any market, you are speculating on the nature of the price change of the insurance policy. When you sell, or write a put option, you are obligated to buy a security at the strike price from a buyer should they exercise the option to sell the stock by the expiration date. Your break-even point occurs at the strike price minus the premium you charge for the transaction.
The extra $0.35 is time value, since the underlying stock price could change before the option expires. Different put options on the same underlying asset may be combined to form put spreads. In general, the value of a put option decreases as its time to expiration approaches because of the impact of time decay.