The stock price must remain the same or increase above the strike price for the put seller to make a profit. If the ABC company’s stock drops to $80 then you could exercise the option and sell 100 shares at $100 per share resulting in a total profit of $1,500. In a covered call strategy, a trader sells out-of-the-money calls on a stock they own.
The range of strike prices you can choose from is typically determined by the options exchange. A short put, on the other hand, occurs when you write or sell a put option on an asset. Let’s say you believe Company X’s stock, which trades at $98, will drop in the next week to $90 and you decide to make the purchase. If the put option trades at $2, you sell it and net $200, setting at your buying price at $90, provided the stock trades at that price on or before the date of expiration. Yes, a put option allows the contract holder the right, but not the obligation, to sell the underlying asset at a predetermined price by a specific time. However, if you have a short position on the bearish ETF, if the S&P 500 gains 1%, your short position should gain 1% as well.
Writing call options vs. writing put options
Then, if there is a depreciation in the price of the underlying asset, the investor can sell their holdings at the strike price. Put buyers make a profit by essentially holding a short-selling position. If you’re looking to trade options, you can sell them as well as buy them.
Call Options vs. Put Options
If you’re looking for a long-term investment option, stocks are probably the better choice and tend to be a better option for new investors. Options can be more flexible and often come with smaller investment requirements. But the strategies are more complex and are typically better-suited for more skilled investors. The strike price is the price your asset is at when a call or a put option can be exercised.
The value of a put option in the market will vary depending on, not just the stock price, but how much time is remaining until expiration. For example, if the stock is at $90 and the ABC $95-strike put trades $5.50, it has $5 of intrinsic value and 50 cents of time value. In this case, it is better to sell the put rather than exercise it because the additional 50 cents in time value is lost if the contract is closed through exercise. Exercising a put option means the investor is choosing to utilise their right to sell the underlying asset at the predetermined strike price.
Why would you buy an option?
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