Put Options by BetterTrades

One of the more difficult concepts for many students to grasp is the notion that it is possible to make money when stocks go down in price. While it is possible to do so with a regular stock transaction (a strategy called "shorting stock"), it is easier and often more profitable to make money in a down market by buying and selling put options.

Buying a put option ensures you the right to sell a specific stock or index (known as the underlying security) for a specific price (known as the strike price) on or before a specific date (known as the expiration date). A student of BetterTrades understands that if a stock has been analyzed and is expected to go down in value, the proper play is to purchase a put option.

Buying a put option is one of the strategies taught by BetterTrades. The company's workshops teach how to use options to make money in the market, regardless of whether a stock is going up or going down. There are strategies that can be profitably used regardless of the prevalent condition of the stock market.

Someone who buys a put option will profit when the stock goes down. A student of BetterTrades recognizes this as the flip side of the call option, which enables the trader to make money if the stock price goes up.

The idea of buying a put option is simple to understand. An individual who buys a put has the right to sell the stock at a specific agreed-upon strike price. For example, you buy XYZ stock at the $35 strike price. Over the course of the option, you want to see the price go down in price. If, for example, the stock drops to $30, the individual can sell it back for $35 (remember, the seller is obligated to buy it back) and take a $5 profit. If the stock price dropped to $25 you would realize a $10 profit. If the stock went the other way, though, you would lose money. If the price rose to $40, you would take a $5 per-share loss or you could actually buy the stock, although that would be rather expensive.

When buying puts, BetterTrades recommends that its students stick with in-the-money options. In the case of a put, this ensures the option's strike price is above the market price of the underlying stock. The opposite is true of a call option; you want the strike price to be below the market price of the underlying asset.

Why would a company sell puts to begin with? These are basically insurance instruments for the corporations. Just like an individual would insure a car or house, a company wants to insure that if something tragic occurs that they would be covered. They would rather pay out a premium (in the form of puts) than risk being improperly insured. It's a strategy that can benefit the average investor and help protect the company, too.

One of the most informative places to learn about puts is at The Dedicated Trader, a subscription trading site created by BetterTrades. You can find out more about the technical aspects of purchasing a put, as well as locate potential candidates that could produce a profit through a put play.