Wednesday, 25 April 2012

WHAT IS PUT OPTION



What is PUT OPTION

If you think a stock price is going to go down, then there are 3 trades that you can make to profit from a rising stock price: 
  1. you can sell the stock
  2. you can buy put options on the stock, or
  3. you can write call options on the stock
Selling stock  huge capital investment i.e.your total capital is @ risk plus u need to cover it cover intraday or supply delivery
Writing call option also need huge margin and risk associated with it is unlimited
Buying put option give u unlimited profit upside and limited risk downside.
Only enemy of put option is time so u should book your profits as early as possible.



Let’s understand using an example. Suppose, today’s date is 25-APR-2012 and you BUY a RELIANCE PUT option (strike=700, EXPIRY  MAY 31) @ Rs. 10  per contract when RELIANCE stock was getting traded at 740. Let’s see what happens after options expiration.

Case I : Reliance stock price greater than the strike price  on expiry day cut-off time

Net loss = Premium paid = Rs. 10 per contract


Case II : Reliance stock price less than strike price (700) on expiry day cut-off time i.e. 640
Net profit = (current price – strike price) - premium = (700-640 ) -10= Rs. 50 per contract


So when you buy a put option you have unlimited profit potential but limited risk or downside.

12 comments:

  1. nice blog, what is put option,nice presentation,can u explain open interest

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  2. for nifty call option put option pls visit http://niftytipsniftylevels.blogspot.in/

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  3. what level should i buy nifty put option for may series

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  4. i found options difficult prior to this blog but now i easily understand differnce between call option put option

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  5. if i buy put option of DLF what could be the target

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  6. i m new trader i need to trade options what is capital required to trade in call put options

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  7. good option call put tips on your blog what strategy to follow now

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  8. which put option do i buy in this market,any other call put tips u recommned ?

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    Replies
    1. thanks for reading our post on put option for option tips keep reading

      Delete
  9. how about writing put options how much stoploss margin should we keep

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  10. gud job done.waiting for your more such articles.

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  11. I have been surfing online more than three hours today, yet I never found any interesting article on option trading like yours. It’s pretty worth enough for me. In my opinion, if all webmasters and bloggers made good content as you did, the internet will be much more useful than ever before.

    ReplyDelete