Today you’re going to learn what a put option is, when do people use it and why you may want to purchase a put option.
What is a put option?
When you’re buying a put, it means you’re looking for the stock to go down, which means you have a slightly bearish outlook. If you’re a seller of a put, it means you’re looking for the stock to go up, which is bullish. Don’t get those two things confused. In this video, we’re focused on the buying side of a put.
Why would you want to buy a put?
Let’s say you own 500 shares of Netflix. You can hedge or protect that investment by buying a put contract. What you may want to do is buy a new put contract, so that way, if that stock goes down, at least you make a little bit of money on the put.
However, the put contract is not going to replace you getting out of the stock, it’s not going to totally negate your position, it’ll only protect a little small part of it. And ultimately that’s what people do when it comes to trading put option contracts.
Each option contract covers 100 shares. So if you own 500 shares of Netflix for example, you can decide how many of those shares you want to hedge or protect, by buying one, two, three or more put contracts.
In this video, we’re looking at how to buy a put option. We will look at a risk profile picture and what that looks like when it comes to buying a put. Also, we will break it apart and evaluate it for different scenarios.
And finally, we’re going to look at how to buy a put option on a trading platform, where I’ll explain in depth how buying a put option contract works, and what are some of its benefits.
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