Put Options Education

In this video, Veronica from Zecco Zirens speaks about Put Options. This is a trade that gives you the right to sell a stock to someone else at a specific price somewhere in the future. Brokers want you to know that this is a very complicated trade so you will pay them to do it for you. You can learn the loan put option strategy by watching this video. Investors are using the loan put strategy when they predict that a stock will go down in price. If you buy a put option with a strike price equal to or above the current market price, and the price of the stock goes down as you predicted, you can sell the underline stock at a price higher than the market price. It is kind of selling a Toyota for the price of a Mercedes.
The nice thing is that you don't have to own the stock to do it. You can simply sell the put before it expires and earn the difference between your price and the sale price. Here is how it works. When you buy a single put option, you have the right to sell 100 shares of stock at a certain price at some point in the future. This is the strike price. The amount that you pay is called the option premium. The premium is all you can lose, so you know right from the start what you are risking. Now, if the underline stock goes down your gain is leveraged because each option contract gives you the right to sell 100 shares at a price over the market price if the strike is above the current market price.

Let's take a specific example. You think at a stock which is trading at $10 a share. You can buy 100 shares, so the total investment will be $1000. But perhaps you don’t have the money. You can buy an option with the strike at current market price. The price of that contract is one dollar. Since each option controls 100 shares, it will cost you $100 plus commissions to purchase that option. Now, you own the right to sell 100 shares of that stock at $10 a share at any point in time before that option expire. Now, let's say that the price of that stock goes down to $8. You can sell that option and make $200 minus your $100 investment. So, you have $100 NET, with 100% profit.

You cannot make mistakes, this is a short-term strategy. If the price of the stock goes up, then you lose your initial investment. If your option is in the money you probably want to sell it before it expires. So why could this be a good trade? For three reasons:

  1. 1. It is easy to trade. You only have to trade a single put option to execute it
  2. With a put option, you have limited losses. You can never lose more than the amount you paid to purchase the option.
  3. It is a leveraged trade. If you are right about your predictions in the movement of the stock on the short-term your gain can be substantial, relative to the amount of money you risked
Submitted by YouTube Trader on Thu, 04/08/2010 - 11:58

Recently Posted Videos