Put Options

The textbook definition of an option is as follows: The right, but not the obligation, to buy or sell a specified asset at a predetermined price over a predetermined time.

Buying a Putbuying-puts

Buying a put is a bearish strategy that requires a price drop in the underlying instrument (stock or ETF). Nonetheless, the most critical factor in trading puts profitably is an ability to predict the future price moves of the underlying instrument.

The investment return on a put is the profit or loss divided by the initial investment. The formula is the following:

Return = (profit or loss)/initial investment

For example, if you buy a S&P 500 (NYSE: SPY) option for $4 and sell it for $6, for a profit of $2, your return on investment is 50% (2 divided by 4 equals 0.5, or 50 percent). Annualizing the return will give you another perspective on the return. If this particular trade covered 3 month from beginning to end, you would have made a 200 percent annualized return.

However, in most cases, the return on investment is not the major criterion of buying a put. The main reason for buying is leverage. You can gain large percentage gains with a small investment. The low price of puts makes discussions of rates of return almost meaningless when examined on a trade by trade basis. Many of your trades may make 200 percent, but your losses may be 100 percent. These are large percentages simply because the initial investment is so low.

Selling a Put

Selling a put is a bullish strategy. Put sellers want the price of the underlying stock or ETF to rise so they may buy back the put at a lower price or simply let the instrument expire worthless. The ideal situation for a put seller is for the price of the stock or ETF to move above the put’s strike price at expiration, thus rendering the put worthless. The put seller will have captured all of the premium as profit.

A ‘Must’ Strategy for the Future: Insure Your Portfolio

Learn the investing strategies that allow you to make money in any type of market environment. It's like having portfolio insurance.

‘Sell in May’ Takes On a Whole New Meaning

Don’t allow your hard-earned money to suffer from dismal market performance. Join the savvy investors earning profits in every market environment.

This Strategy Made 140.6% During ‘Sell in May and Go Away’

Here's an easy, profitable solution for the six-month slump known as "Sell in May and Go Away." The strategy generates income no matter the market's moves.

How I’m Trading Disney Earnings This Week

I'm watching closely for the Disney earnings report this week, ready to make another profitable options trade using my proven strategy. You can, too.

The One Statistic You MUST Know to Be a Successful Options Trader

This one statistic is one reason I've been so successful since I introduced this earnings season trading strategy to subscribers 18 months ago.

More Recent Put Options Articles