Learn trading ideas & strategies from TradeKing's experts

Upcoming Live Events
More live events...
Learn it. Trade it.

Open your TradeKing account today!

Upcoming Live Events
More live events...

Put Options Explained


It’s strange but true: many investors who are perfectly comfortable trading call options get a little squeamish around put options. Puts are certainly nothing to be afraid of. When used properly, they can add a whole new dimension to your trading.

What are puts, exactly?

Put options are basically the reverse of calls: a call gives the owner the right to buy stock at a given price (the strike) for a certain period of time. A put, on the other hand, gives the owner the right to sell stock at the strike price for a limited time. Let’s discuss owning puts first, followed by holding a short put position.

If you own a put on stock XYZ, you have the right to sell XYZ at the strike price until the put option expires. Your maximum possible profit is obtained if the stock declines all the way to zero. The math for determining the profit is equal to the strike price less the premium paid for the put. (Don't forget to factor commissions and taxes in there, too.) On the other hand, the maximum potential risk is losing the entire premium paid to purchase the option. This happens if the stock is at or above the strike price at expiration.

If you short a put on stock XYZ, it means you’d be obligated to buy XYZ from the put holder at that strike price if the holder exercises before expiration. In return, you’d earn a premium in exchange for taking on that potential obligation, and the premium received would be the maximum potential profit for this trade. This would occur if the stock is at the strike price or higher. However, you would hit the maximum potential risk if the stock fell to zero. The loss incurred would be equal to the strike price (at which you’d be obligated to buy the security) less the premium you received. Again, these calculations don't factor in commissions or taxes, but in real-world trades you need to consider both of those.

Puts can be used to help protect profits in an existing position; they can offer a less complicated alternative to short-selling; or you can use them as a vehicle to generate income. The next few articles explain all three of these uses, with an emphasis on the first one, protective put strategy. So read on, and begin to wrap your mind around puts...it'll be well worth it.






Related Strategies

1525 Long Leveraged ETF
Long Leveraged ETF A leveraged ETF’s price is designed to move in multiples of two, three or more times the price movement of its target index. The target index may be broad-based, like the S...

217 Long Call Image
Long Call A long call gives you the right to buy the underlying stock at strike price A. Calls may be used as an alternative to buying stock outright. You can profit if the stock rises, without taking on all...

1350 Buy Value Mutual Fund
Buy Value Mutual Fund Value mutual funds seek out stocks that the fund management considers undervalued by the marketplace – good bargains at current prices. Typically, this involves using fundamental analysis to examine...

More strategies...

All-Star Analysis

Fund of funds on 05/16/2011
a collective investment vehicle (hedge fund or mutual fund) that invests in other funds that may or may not be directly available to retail...

If I "buy to close" a short position, how can I be sure I will not be assigned? on 05/18/2011
  At the end of the day, the Options Clearing Corporation accumulates all option exercises. Prior to processing...

Limiting Downside Risk with Collars on 07/18/2016
Brian Overby walks through an example of how investors might use a collar option strategy to limit some of the downside risk in the market...

More analysis...

On-Demand Videos

Exploring Volatility Index Options

Trading volatility is an interesting way to expand your trading and move away from the comfort zone known by most...


Rookie's Corner: Technical Insight and Strategy Builder

Are you interested in automated technical analysis or creating your own strategy seeker? TradeKing offers two...


How to trade a hot-issue IPO at TradeKing

IPOs offer potential profits as well as possible risk. Join Nicole Wachs as she explains...


More videos...