What is Call Option and Put Option? A Beginner’s Guide

Since Max doesn’t own any shares to sell, the put option will initiate a short position at $11. He can then cover the short position by buying the stock at the current market price of $8, or continue to hold the short position. You can sell put options as a bullish strategy to express an upward directional bias. Instead of paying a debit to enter the position, you receive a credit for selling the option to a buyer in the market.

What Happens to Put Options on Expiry? – Selling Put Option

In this case, exercising the put option would result in a short sale of 100 SPY units at the $425 strike price. The investor could then buy back the 100 SPY units at the current market price of $415 to close out the short position. If you’re a put seller, your earnings are limited to the premiums paid for the options. As a put holder, you make money if the share price of the underlying asset drops below the strike price and you sell at the higher strike price.

Put options: What they are, how they work and how to buy and sell them

As shown in the above chart, if the stock moves down 40%, a short-seller earns $200. The buyer pays the seller a pre-established fee per share (a “premium”) to purchase the contract. NerdWallet, Inc. is an independent publisher and comparison service, not an investment advisor. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only. NerdWallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances.

Selling the Option

Option trading levels range from Level 1 to Level 5, with Level 5 being the most complex. The larger stock market is made up of multiple sectors you may want to invest in. A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation.

1. The buyer of a put option believes that the underlying stock will drop below the exercise price before the expiration date.
2. Limit orders are also a must with options trades, so that you avoid running up your costs.
3. If you already owned the shares of XYZ, you’ll receive a higher price for them than you would have otherwise.
4. Call options also have a relatively shorter lifespan, so it is suitable for traders who trade on a very short-term horizon of five days to three months.

Alternatively, when the premium of a put option declines, the stock price rises considerably. The put option provides a buyer with the right to sell the underlying asset at the specified strike price. But the ‘ put option’ seller has to buy the asset when the put buyer starts exercising their option. Please note that the buyers and sellers thoroughly determine the market value of options.

The rush of short traders into buying the stock could exacerbate the move higher in the stock’s price–called a short squeeze. Now let’s assume that Max does not actually own shares of Ford but has bought the $11 put, and the stock is currently trading at $8. He could purchase shares put meaning in share market of Ford at $8  and then have the broker exercise the option to sell the shares at $11.

You buy the shares of XYZ for $3,500, even though they’re only worth $3,000. Our partners cannot pay us to guarantee favorable reviews of their products or services. There are no real alternatives to put options, but there are similar tools an investor can use.