Buying Put Options on Robinhood - Trading Options Example

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What Is a Put?
A put is an options contract that gives the owner the right, but not the obligation, to sell a certain amount of the underlying asset, at a set price within a specific time. The buyer of a put option believes that the underlying stock will drop below the exercise price before the expiration date. The exercise price is the price that the underlying asset must reach for the put option contract to hold value.

A put can be contrasted with a call option, which gives the holder to buy the underlying at a specified price on or before expiration.

The Basics of Put Options
Puts are traded on various underlying assets, which can include stocks, currencies, commodities, and indexes. The buyer of a put option may sell, or exercise, the underlying asset at a specified strike price.

Put options are traded on various underlying assets, including stocks, currencies, bonds, commodities, futures, and indexes. They are key to understanding when choosing whether to perform a straddle or a strangle.

The value of a put option appreciates as the price of the underlying stock depreciates relative to the strike price. On the flip side, the value of a put option decreases as the underlying stock increases. A put option's value also decreases as its expiration date approaches. Conversely, a put option loses its value as the underlying stock increases.

Because put options, when exercised, provide a short position in the underlying asset, they are used for hedging purposes or to speculate on downside price action. Investors often use put options in a risk-management strategy known as a protective put. This strategy is used as a form of investment insurance to ensure that losses in the underlying asset do not exceed a certain amount, namely the strike price.

In general, the value of a put option decreases as its time to expiration approaches due to time decay because the probability of the stock falling below the specified strike price decreases. When an option loses its time value, the intrinsic value is left over, which is equivalent to the difference between the strike price less the underlying stock price. If an option has intrinsic value, it is in the money (ITM).

Out of the money (OTM) and at the money (ATM) put options have no intrinsic value because there would be no benefit of exercising the option. Investors could short sell the stock at the current higher market price, rather than exercising an out of the money put option at an undesirable strike price.

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#OptionsTrading #BuyingOptions #PutOptions
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