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  1. What is a put option?

  2. Who would sell a put?

  3. What determines the price of the option premium?

  4. Who should deal in the listed options and can I make a lot of money buying options?

  1. What is a put option?
    A put gives the buyer the right to sell 100 shares of stock at a pre-agreed price (strike price) for a specified period of time. A put buyer is betting that the price of a stock will go down during a particular period--just the opposite of a call buyer, who looks for price appreciation. For example, let's say that a six-month put option on Walmart at $50 a share might cost $300. This would entitle the put buyer to sell 100 shares of Walmart at $50 per share. Let's assume that Walmart goes down to $30 per share. Because the put owner may then purchase 100 shares of Walmart at $30 per share in the open market and sell the shares to the put seller, there is a profit of $1700, $2000 from the spread in stock prices minus the original option premium of $300.

    But if at the end of the option period the stock is higher than $50, the put buyer loses his $300 but no more than that.
     
  2. Who would sell a put?
    An investor who expects a stock to go up, and would thereby pocket the option premium, or an individual who would actually like to acquire more shares of a stock for less than the market value.
     
  3. What determines the price of the option premium?
    The option premium is determined by a number of factors, including:
     
    • supply and demand
    • time remaining in the life of the option (duration)
    • volatility of the underlying stock
    • the level of interest rates and other market factors
  4. Who should deal in the listed options and can I make a lot of money buying options?
    Yes! you can make quite a bit of money buying options, if you are able to predict which stocks will go up (calls) and which will go down (puts) and when these things will happen. Timing is so important because you make money with options only if you own the option during a price climb or fall. Before or after doesn't count! Remember that option trading is not for everyone. They are appropriate only for those investors who are willing to take time to learn this specialized method of investing. Options are a very tricky business and should be used only by the informed.

<<== Complete Index of Questions

More Questions On Options ==>>



**Recommended Reading**
cover

Getting Started in Options

An excellent first read on the subject, this book carefully and completely defines the terminology, explains options investing step by step, and presents strategies so that it is easy to understand at each level of risk involved.


 

 

         

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