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Easy Guide to Learning Put Options

Put Options

Put options are often a topic of discomfort and uncertainty for options investors. If stock values decline, a put option holder may yield a profit by choosing to exercise his/her right to sell stocks at a higher price. However, if stock prices do not decline then an investor will not be able to redeem his/her option. In cases such as these, not only will the buyer not make a profit, but he/she will also lose the premium payment he/she supplied the writer. Therefore, while these types of derivatives may have benefits for an investor, they are also risky undertakings.

Individuals do not always purchase put options with the intention of turning a profit. In many cases, investors obtain these derivatives in order to hedge their investments. If a shareholder obtains a put option and the value of stocks decrease, then he/she will be permitted to sell his/her stocks for a reasonable price, thereby protecting his/her investments. If a shareholder does not possess a put option during a decline in stock price, he/she will be required to sell his/her stocks for a lower price than he/she purchased them, thereby losing a portion of his/her investment.

NEXT: Know About Option Valuation Before Purchasing a Stock Option

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