A put option¬†is a derivative that gives the owner the right, but not the obligation to sell shares of stock at a set price, for set period of time. Put options are bought when you have a bearish (market heading lower) view on the market or on a particular stock. Let’s say that a stock you have been watching has been trending ever lower in price over the last six months. If the stock in question is currently trading at $40 and you believe it will fall lower, buying a put at the $42 strike price might be a good strategy.
As the price of the stock falls below $40 your put at the $42 strike price becomes even more valuable.


A put option at the $42 strike increases in price because the put option gives the owner the right to sell shares of stock at $42 even though the price of the stock is lower.
If you hold a put option you want the price of the underlying stock to decrease, whereas when purchasing a call option, you want the security’s value to rise. If the stock were to fall to $35 a share your $42 put option would have $7 of intrinsic value, not including any time value that remains depending on how far away expiration Friday is. A position that can allow you to profit with less risk would be to purchase a put option contract. Intrinsic value is calculated by taking the ¬†strike price of the option and subtracting the current price of the stock ($42 – $40 = $2).


In the money options have a statistically higher chance of expiring in the money and thus making you a profit.



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