Although
Stock Options are bought and sold the same as individual
stocks, Stock Options are not the same as Stock Investing
or Trading. An investor should study the field of "Options" before
attempting to invest or trade options.
Options are one of the best methods I know for leveraging,
hedging, and money management in investing and trading, for
the experienced Options trader.
My last Options article focused on describing Call Options.
This article will describe Put Options. Please keep in mind
that any profits and losses I mention DO NOT include commissions
or other Options trading costs.
A Put Option gives you, the holder, the right to sell the
underlying security at the striking price at any time until
the expiration date of the Option.
Remember in the last article I stated "Let us assume
we are going into a bear market and Dell drops from $100
to $70".
If we bought a call option for $9.00 as stated in our previous
article, we would have a $900 loss (the most we could lose).
However, if we had predicted that the market was going down
and purchased a Put Option instead, we might have a profit.
We're in the month of October and
I want to buy at least 3 months out. This means I will
have three months for Dell
to correct. I check out the various strike prices and months
(as in the call option play). I predict the correction, based
on my chart reading and the fundamentals, that Dell may be
heading lower to its support of $85 in the near future. I
narrow my choices down to three; the January 100 strike at
$7.00 per contract. This is called "at-the-money" because
Dell is $100; the March 90 at $9.00 or the April 80 at $11.00,
both called out-of-the-money, because Dell's price is higher
than the strike price ($10 and $20 out-of-the-money respectively).
Remember that a put is considered to be in-the-money when
the underlying stock is below the striking price of the
put option as with Dell at $100 and the striking price
is $105; wherein a call is considered to be in-the-money
when the underlying stock is above the striking price of
the call option, i.e. Dell at $100 and the striking price
is $95.
The put is out-of-the-money when the stock is above the
striking price, i.e. Dell $100 and striking is $95, and the
call is out-of-the-money when the stock is below the striking
price, i.e. Dell is $100 and striking is $105.
When the option is in-the-money, it
has intrinsic value. Intrinsic value is “real” value
and is the difference between the striking price and the
stock price.
Therefore, if Dell is at $70 at expiration, it has 30 points
of intrinsic (real) value. If there is time remaining (assuming
it is December 10 and Dell goes to $70) you may have even
more profit because there will be some time remaining. Remember,
your expiration date is not until January.
I decide to purchase the January 2002 100 strike for $7.00
($700 per contract). Why did I make this decision? One could
say because it's cheaper, but I consider other factors as
well.
1. It is less expensive and that makes it good. However,
with the others, even though you may pay a little more, you
have more time for Dell to make its move.
2. I happen to think Dell is going down in the near future
so I will go with January.
3. The at-the-money call means when Dell begins to tank,
my 100 call will be in-the-money where my profit begins.
Many of you have heard of short selling a stock. A discussion
of short selling is beyond the scope of this article, but
they are both similar. In both cases one wants the stock
to go south.
Previous Options Articles:
Options Start
Options Article 1
Options Article 2
Options Article 3
Options Article 4
Options Article 5
Options Article 6
Jenyce Johnson
Options Strategist, Trader and Coach
Not a licensed professional
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