Put
Candlefocus EditorThe power of the put rests in its ability to allow the holder to benefit from a significant decrease in the price of the underlying asset without risking their full capital. For instance, in the case of a strongly trending falling stock, an investor could purchase a put with a strike price much lower than the current market price. If the stock continues to fall and dips below the specified strike price before the option’s expiration date, the investor will be able to sell the stock at the strike price and realize a profit.
Conversely, the potential attractiveness of buying a put and profiting from a falling stock also has its risks. If the stock’s price does not fall below the set strike price of the option, the investor will lose the premium paid for the option. In addition, the stock’s price may not drop at all, or may in fact rise before the expiration date, leaving the investor with no option but to sell the stock immediately at a loss, as the option could become worthless.
Thus, buying puts is one way investors, including speculators or hedgers, can attempt to make money by anticipating price movements of an underlying stock. Purchasing puts is generally used as a conservative approach to manage and protect a portfolio against a sudden, dramatic drop in the underlying asset’s price.