Your Daily Bit of Wall Street Wit & Wisdom

“A put might more properly be called a stick. For the whole point of a put — its purpose, if you will — is that it gives its owner the right to force 100 shares of some godforsaken stock onto someone else at a price at which he would very likely rather not take it. So what you are really doing is sticking it to him.”
— Andrew Tobias

Puts options are extremely useful for both traders and investors.  They can provide safety, but are also dangerous for those who don’t understand how they work.

Options (puts and calls) allow you to control a large amount of an underlying instrument (stock, index, or futures) with much less of your own money than you would need to buy or sell that amount outright.  Options give you the ability to profit from price movement up and down.

The buyer (owner or holder) of a put option has the right, but not the obligation, to sell a specific amount of an underlying instrument at a specified price (strike price) within a specified time (expiration).  Put buyers have unlimited profit potential with an always known and strictly limited risk at all times.  This is known as Superleverage.

The seller (writer) of a put option has the obligation to buy a specific amount of an underlying instrument at a specified price by a specified time.  Put sellers take in a limited return with unlimited risk.

The option price which buyers pay and sellers receive is known as the option’s premium.

Put options may be purchased by sensible speculators seeking to profit from down moves and investors looking for portfolio protection.  Put options may be sold by investors to earn instant income and to position to buy shares below their current market price.

Exchange-traded put and call options are powerful tools for traders and investors.

Understand their risks and rewards, then use them wisely.

Best regards,

Steve

 

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