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What Are Put Options?

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Buying put options is a bearish strategy using leverage. It is a risk-defined alternative to shorting stock.

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The trader is either risk-averse. They want to know beforehand their maximum loss or they wants greater leverage than simply shorting stock.

For this example, the trader will buy only 1 put option contract. Note: One contract is for shares.

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There are numerous reasons, both technical and fundamental, for why a trader could feel bearish: Options offer defined risk. Options Offer Defined Risk When a put option is purchased, the trader instantly knows the maximum amount of money they can possibly lose.

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This is the risk-defined benefit often discussed as a reason to trade options. Options Offer Leverage Another benefit of options is leverage. When a stock price is below its breakeven point, the option contract at expiration acts exactly like being short stock.

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Why foolish? Put Options vs Shorting When buying optionsa trader needs to predict: The correct direction of stock movement, The correct size of the stock movement, and The time period for when the stock movement will occur.

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These factors make put options more complicated than shorting stock, since shorting only requires predicting that the stock price will move downward.