What Are Put Options?
Buying put options is a bearish strategy using leverage. It is a risk-defined alternative to shorting stock.
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.
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.
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.
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.
These factors make put options more complicated than shorting stock, since shorting only requires predicting that the stock price will move downward.