Why would a person buy a put option?

You normally invest because you believe in the product or the caller. You may think the company will grow as more people learn about the product, or as the company releases modern intersection lines. But, every once in a while, you might think a ship’s company is a pawl ( a bad company ) and that the market price of the company is above what you believe it is worth. Since you expect the price of the stock to fall, you don ’ triiodothyronine want to purchase it. But you could try to profit off your insight. Believing that the stock price is heading downward, you may purchase a arrange option. buying that choice gives you a certain sum of time to potentially profit if the stock goes down. alternatively, let ’ s say that you own shares of stock in a company you like. You would prefer not to sell them, but you ’ ra nervous the banal might be ready to decline in price. possibly a new product is launching and you ’ ra not certain if it ’ ll be a success. If it is successful, the value of the company may go up. But if it ’ s a mess, you might expect the price of the underlying stock to fall.

In this situation, buying a arrange option doesn ’ t beggarly you are betting that the company is overvalued. rather, you may want to put a final under your feet ( this would be called a protective frame ). If the caller is presently trading at $ 100 a share on the store market, and you think there ’ s a chance that the stock will fall to $ 70 a share, you may help protect your position with a place option. possibly you buy a place option that allows you to sell your shares at $ 80 a plowshare. then, if the price falls below $ 80, you are still guaranteed that price for a fit period of prison term.

In this case the put option functions sort of like an insurance policy against a steep decline in respect. If things work come out of the closet and the price stays above $ 80, you don ’ t have to worry about anything. You could merely let the choice run out. Keep in mind, the premium you paid for the option would technically eat into your stock profits, but as with any indemnity policy, it would be a tradeoff you were will to make. Put options work this way for more than just stocks. You can buy them for corporate bonds, banknotes, commodity futures, currency exchange contracts, index funds, exchange-traded funds ( ETFs ), derivatives, and other fiscal instruments that experience price movements. A arrange option is merely the right field to sell any of these securities at a preset price for a specify duration of prison term. Buying and selling options preferably than the underlie stock is known as options trade. There are several strategies used by option traders, and a put choice is one tool in the toolkit .