Put Options

Put options are derivatives used by bearish investors and traders who believe the stock market could be heading lower over a specific timeframe. Options are issued via the Chicago Board Options Exchange (CBOE) and the underlying instrument could be stocks, indices, or commodities. Investors are bearish when looking at put options.

When you buy a put option, you buy the right to sell a specific number of the underlying instrument at the strike or exercise price for a specified length of time determined by the expiry date of the contract. After the expiry date, the particular option expires worthless.

Investors can hedge against downside weakness by buying put options on the underlying instrument. For example, if you believe the S&P 500 could decline, you can buy put options on the SPDR S&P 500 ETF (NYSEArca/SPY).

You can also use put options as a strategy to buy the underlying instrument at a lower price than the prevailing price. Say Microsoft Corporation (NASDAQ/MSFT) is trading at $45.00, but you are interested in buying only on weakness down to $40.0. Under this assumption, you can sell or write a put option on Microsoft with a strike at $40.00. You would then be required to buy the stock if it falls to $40.00, which is what you were aiming for.


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