I am trying to make it a little cleaner with the new layout. This is how most people would trade options Trading Options For Dummies Cheat Sheet. To get a better understanding of the payoff of a put option, take a put options diagram 2nd optiond the following option strategy graphs: Hi Manojg, The seller of the 2ns option is short the option, not the stock. You can see the payoff graphs of the two in the below links; Buying a Call Option Selling a Put Option Hi, Is short selling a put option equivalent to buying a call option, since in both situations you are bullish on the market directions.




Like the long call a long put is a nice simple way to take a position on market direction without risking everything. Except with a put option you want the market to decrease in value. Buying put options is a fantastic way to profit from a down turning market without shorting stock. Even though both methods will make money if the market sells off, buying put options can do this with limited risk. Hi Ron, No, but you will have to sell the stock at the strike price.

If you don't already own the shares then your broker will borrow the shares on your behalf and then sell those shares to the seller of the put option. You will then have a "short" position of shares in your account traded at the strike price that you will have to buy back at a lower price in order to make a profit. I have a long put option at 75 and at the strike date completes and the stock price is Will I have to buy the stock at 75?

Don't know much about options. Hi Jamaal, Option prices premiums will fluctuate in response to changes in factors such as underlying price, volatility, time decay and interest rates. The price of the option can rise after you have purchased it providing you with an opportunity to profit by selling it back to the market at the higher price - instead of exercising it or waiting for the option to expire before exercising.

Does this answer your question? Hi, Whats happens if the long put position rises more than the premium paid but then it starts declines in prices before expiry? In other words can a worthless long put contract turn to profit? Volatility is a major component that makes up the price of the option; higher volatility put options diagram 2nd higher option prices, lower volatility means lower option prices.

Perhaps the volatility was relatively high when you bought the option only for it to decrease post purchase? Let me know if anything is not clear and I'll update the page with your feedback. You have a knack for explaining complicated terms and scenarios in a digestible fashion; thank you. I'm just looking for a general understanding of the graph. Hi Brian, yep, I see what you mean for long puts - your profits are capped at the strike - stock price.

For a long call, however, your profits are limited only to the price that the stock can rise to. I would say that it is used to provide some context on a likely move for a stock i. I'm really confused about this claim of "unlimited profit. It still isn't infinite. No one sells you an option for free. Where is this idea of infinite profit potential coming from? Hi Larry, If you think that volatility will play a lager role in the SPY than the price then I would say you would be best buying the near term at-the-money put option.

Near term options are more sensitive to changes to volatility. However, you should also consider how far you think they market has to move in your favour. Vega or price change due to volatility is highest for ATM options so as the market does move more in your direction it may move past the strike. So, another suggestion is to buy a put option that is slightly out-of-the-money so that as the market approaches your strike level you get maximum change in premium due to volatility changes.

Hi, I am interested in buying two put options for SPY, since I think it will go down with strong volatility, with one option with 6 months and the other 1 year expiry. But how do i choose different strike prices because with the same expiry date, one strike price higher 5 dollars but the option price is only 3 dollars more expensive? I know it has something put options diagram 2nd do with time value. How do I choose the best strike price? Hi Kevin, Sorry for the delay in responding!

I saw your post and thought it would take more thought to respond so I put in the "too hard basket" ;- However, upon re-reading it I'm not sure I follow the posters' strategy. Also, XYZ seems to be a fictitious stock so I don't see how I can confirm the price changes and option prices ;- Peter, I copied this from another poster in your blog here.

My question is this, as this is the style of spreads I am looking into making myself, these numbers don't add up to me. Can you explain in laymans terms what this guy did and how it works to profit either at or just before expiry??? The problem here is it seems to good to be true. Am I misinterpreting something OR does that sound about put options diagram 2nd Hi Konstantin, Thanks for the feedback on the site! I am trying to make it a little cleaner with the new layout.

Using options really depends on your objectives. If you hold stock and wish to gain some extra income in return for giving up some upside potential then covered calls might suit. If you want to buy a stock at a lower price within 2 months and get paid for that then you might like shorting puts. If, like you asked, want to just make huge returns punting on market direction then you are best placed buying and selling options just trading them as if they were stocks.

But you will need to have a view of the market i. Using options this way provides a lot of leverage or bang for your buck with your money. Hey Pete, First, love your new style of website great job : Ok, I'm use to trade Future Contract, and is very easy to sell and Buy. But now, i'm looking to go to my TFSA and RRSP account to trade and get tax free : money Love Canada System: but I make some money : and this why I have question for you.

So my question it's In that case the counter party will be another option buyer. Am studying about options. Hello Peter,let me clarify a doubt about a question put up by Vishal on 1st November, Is not the answer would be like "the seller or writer of the option ". Hi Shawn, that's seems fine to me - that is the power of leverage and the main reason retail traders use options. But, you can also lose those amounts or your entire premium if the market goes against you.

Hi Bev, Sure, you can wait until the expiration date and exercise the option but this will require capital to take on the position. However, you won't have any trouble getting out of the position if you really want to. The option market makers will always be there to take the other side of your order. If there isn't a bid ask market there you can perform a "quote request" if the market and platform supports it where market makers will respond with a double sided quote. If not, then you can place an order yourself and adjust it until someone takes it.

Once the order is priced above the option's intrinsic value you will definitely get hit on it. I have bought long put contracts on a stock currently selling for 8 dollars. It is expected to easily move down to 6 dollars or less. I bought 40 contracts at 1. Not a lot of volume in other words. For such inexpensive stocks and currently low open interest is there a point you had best sell? In other words, say I held the option until it went down to 4 dollars.

Who would buy this now expensive put option from me for say 3 dollars when they can just short the stock itself for 4 dollars? Or can I hold it until it would reach the 4 dollar mark and then exercise it? Using an online trading platform, how do you actually exercise it? I have only closed the option contracts in the past so not sure how that works?

Great site by the way - most appreciated. Buying put is the opposite of buying a call. When an investor is bearish he can buy a put option. A put option gives the buyer of the put option a right to sell the stock to the put seller at a pre-specified price and thereby limit his risk. No, that's the advantage with buying options - your maximum loss can only be the premium paid when you bought the option.

I purchased BUY a put option that is about to expire worthless. I wanted the price to drop when I bought the put, and it didn't it went higher I do not own the underlying stock. Is there any more risk of loss if this position expires other than the cost of the initial trade? If the option is American Style then it can happen either at expiration or when the buyer of the option chooses to exercise.

If the option is European it only happens at expiration. Question on selling puts Am I put shares when the strike price is met automatically? Or does this only happen at expiration? Great info Peter, thank you. Also, I had another put of mine on my mind when I wrote that last post. But the put I was referencing to you is actually a two letter designation for a german bank, just so I haven't thoroughly confused you or anyone.

You can exit the trade whenever you like - not just when it hits the strike price. It depends on your view of the stock - if you think it will continue to trend lower, then hold onto it. Or maybe sell half of your position when it hits the strike and keep the rest open if you have more than one contract on it that is. Once the stock trades below the strike the delta and hence your equivalent stock position will start approaching -1 meaning that the lower the stock goes the more value your position will make or lose.

If it helps, I'm using rounded numbers for GS stock price, which was 36 Friday and now is trending down to 32 or so at market open today. My put is for a strike of 30, which we're now getting pretty close to. So I can take good profits now as it's dropped from 40 to 32 on my 30JanP. What happens to my put if I keep holding if the stock goes below my strike price of 30 since I still have several months till expiration?

As the stock price goes below my strike of 30, does that mean I keep making more profit as there is still someone on the other side of the trade now buying a call up to 30? Or is it best to get out once I reach the strike price? Hi Bob, Hard to say exactly You can play around with these numbers yourself using my option pricing spreadsheet. As you are the buyer of the option you have the ability to decide whether to exercise or not, so yes, you can hold onto the option as the stock price moves lower.

I'm new to options trading and have a basic question. In the US this is the OCC Option Clearing Coporation. Whether you are able to go "short" the stock can be up to both the broker to manage client risk limits and the regulators US banning all short sales. Stock borrow would not come into it because if you exercise your put you can just buy does forex really work 7 to 3 stock in the open market at the going price and deliver it sell to the put option writer at the strike price a stratch trade on the stock.

I have been trying to get this answer If you buy a put and the stock is hard to borrow will the broker prevent you from exercising? Hi Metaquotes metatrader 4 download quicktime, if you take a look at the payoff graph above for a put option it will show you how the price of the option changes when the stock price changes.

A put option will gain value when the stock price declines, which is the opposite of a call option. A call option rises in put options diagram 2nd as the stock price inceases. Hi, I am beginner in the options trading. Need help in understanding the call and put. I assume the call and put price will go higher with price of stock coming a strike price. As the stock price of XXXX come downd If you have bought an option and do not wish to "exercise" it, then you simply allow the option to expire and all you lose is the premium paid.

This is why there is no mechanism to ensure that you hold the stock when you buy a put option. To answer your last question That is why the buyer pays the premium to the seller. So here's the really stupid question. One thing I keep trying to get my head around is this. A put option gives me the right to sell a stock at a certain price.

How can I have the right to sell a stock if I don't own it? So if I do own it, and every time you buy a put option, trading station x3 gold some mechanism to affirm put options diagram 2nd I own the underlying stock? Best months for trading forex images I own the stock, I can't see any terribly good reason to buy a put option.

If I don't own the underlying stock, how can I sell what I don't own? So I read that I borrow the stock. Like I borrow your house and sell it? I can't borrow your house and sell it and then buy it back So why does anyone grant permission to lend their stock so someone can play games with it? What's in it for the real owner of the stock? If the option specifications are set for physical delivery, then I guess it depends on your situation with your broker.

They may borrow the stock on your behalf to on-sell to your counterparty who is short the put option. If the option is cash settled i. Hi Vishal, other speculators who are still bearish on the stock, market makers, investors hedging their long stock or option traders who are buying puts as part of an option combination are examples of who would be buying the option from you. When expressed as a percentage, if the underlying stock goes to zero, your gain is infinite.

Hi Yonis, not sure what you mean. Long refers to a purchase and Short a sale A long put is simply the purchase of one put option. Maximum Loss: Limited to the net premium paid for put options diagram 2nd option. Maximum Gain: Unlimited as the market sells off. When to use: When you are bearish on market direction and bullish on market volatility. Call Ratio Vertical Spread. Put Ratio Vertical Spread. Peter October 9th, at pm. Ron easley October 9th, at am.

Peter August 4th, at am. Peter March 26th, at am. Hi Russ, this will be because the implied volatility of the option has decreased by a magnitude greater than the effect of the delta underlying price change. Thanks Peter, clear now. Russ March 14th, at am. Peter March 11th, at am. Peter September 13th, at am. Peter May 7th, at pm. Larry May 7th, at pm.

Peter August 2nd, at am. Also, XYZ seems to be a fictitious stock so I don't see how I can confirm the price changes and option prices. Kevin July 10th, at pm. Peter, I copied this from another poster in your blog here. Peter July 6th, at pm. Konstantin July 4th, at pm. Peter March 26th, at pm. Hi Kuruvilla, No, I think Vishal is saying that put options diagram 2nd was originally the buyer of the put and then he wishes to close the put by selling back to the market.

KURUVILLA March 14th, at am. Peter January 2nd, at pm. Shawn December 30th, at am. Bev November 10th, at am. Thanks for shedding MUCH needed light on that and guidance to other means to close a position. Peter November 2nd, at pm. Bev October 31st, at pm. MAHENDRA KUMAR October 28th, at pm. Peter October 19th, at am. Dave October 18th, at am.

Peter September 29th, at pm. Applebox September 29th, at pm. Bob September 9th, at am. Peter September 7th, at pm. Bob September 6th, at pm. Peter September 5th, at pm. Bob September 5th, at am. Peter August 16th, at am. Sorry - I don't understand your question. Could you elaborate please? How I can differentiate put and call option under long and short term? Peter December 8th, at am.

It depends on what you're trying to achieve Peter September 12th, at pm. Cash time trading July 7th, at am. Raj July 6th, at pm. Peter June 28th, at pm. Hi Hvete, it's not a stupid question at all Hvete June 27th, at pm. Put options diagram 2nd June 21st, at pm.

What will I receive if I exercise a long put and I have put options diagram 2nd assets? Peter November 7th, at am. Peter August 20th, at pm. Stan August 18th, at pm. You don't need negative stock prices for unlimited profit potential. Dami, yes, we can hedge a scrip to decresing in value through long put option. Dylan January 4th, at pm. The profit potential of a long put option is only unlimited if negative stock prices exist. Admin January 2nd, at am. Admin September 25th, at pm.

Yep, that's a strategy called a Protective Put. Please see the link under Bullish category. Dami September 24th, at pm. Don't we use long puts to protect a stock we currently own from decreasing in value.




Drawing Payoff Diagrams


Options Strategies QUICKGUIDE Options involve risk and are not suitable for all investors. OIC makes no warranties, A put option is in-the-money if. Put options are bets that the price of the underlying asset is going to fall. Puts are excellent trading instruments when you’re trying to guard against losses in. Put payoff diagram. Deepak. 61 ECONOMICS AND FINANCE, American put options. Save; Important Diagram for fantastic-art.rus. PJ COMMERCE ACADEMY. Diagram.