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Put and call options are some of the most popular derivatives traders around the world have access to. Such derivatives allow traders to speculate on the price of the underlying asset, without the obligation of owning the asset itself.
This increases liquidity on the market and gives traders even more profitable opportunities to make trades and increase the efficiency of the market as a whole.
Put options are derivatives that profit from the downward movement of an underlying asset, which can be anything from a stock, ETF, bond, commodity, currency pair, crypto, etc.
Put options give traders the right, but not the obligation, to sell a specific underlying asset at a predetermined price within a specified period or on a specific date.
Put options are complex financial derivatives and inexperienced traders are not advised to start their career on the market by trading options. However, they are also easy to understand once you know the basics of how options function and how to trade them profitably.
As already mentioned, a put option gives traders the right, but not the obligation, to sell the underlying asset at a predetermined strike price once the put option has expired.
A standard put option is composed of the following:
Put options give certain rights to the option holder. This gives them some flexibility in their decision making when choosing to exercise or sell the option:
While the potential loss from an options trade is limited, options trading overall still comes with a few key considerations with regards to risk and potential for profit:
Writing put options comes with a few requirements. Writing naked put options is considered highly risky as the downside for the writer is practically unlimited.
Put options come with their fair share of advantages and disadvantages, which are important for traders to consider to help them decide whether options trading is the best course of action for their financial objectives.
A put option gives the holder the right to sell an underlying asset at a predetermined strike price before or on the expiration date. It profits when the asset's market price falls below the strike price by more than the premium paid for the option.
Yes, put options can be risky. While they offer profit potential from falling asset prices, they have limited lifespan, time decay erodes their value, and a wrong market move can result in the loss of the premium paid for the option.
The maximum loss when buying put options is limited to the premium paid for the option. However, if you are the writer (seller) of put options, your potential loss can be significant and theoretically unlimited if the market price of the underlying asset rises significantly.