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Put Option
Definition:
A put option is a financial contract in which the holder has the right (but not the obligation) to sell a specified quantity of a security at a specific price (strike
price) within a fixed period of time (until its expiration).
For the writer of a put option, it represents an obligation to buy the underlying security at the strike price if the option is exercised.
Put Buying vs. Short Selling
Compared to short selling the stock, it is more convenient to bet against a stock by purchasing put options as the investor does not have to borrow the stock to short. Additionally, the risk is capped to the premium paid for the put option, as opposed to unlimited risk when short selling the underlying stock outright.
However, put options have a limited lifespan. If the underlying stock price does not move below the strike price before the option expiration date, the put option will expire worthless.
Trading Put Options
Buying Puts
Put buying, or long put, is one of the simplest strategy in options trading.
Selling Puts
Selling puts, or short put, involves more risk but can be profitable if used properly. One can sell covered puts or naked (uncovered) puts.
Put Spreads
Put spread is an options strategy in which a put option is bought while another put option is sold on the same underlying security simultaneously.
Common examples of put spreads include the bull put spread and the bear put spread.