Put options are a contract between a buyer, known as the holder, and a seller, known as the writer.
An investor can profit from both buying and selling put options, but there is risk involved. This article should provide investors with the understanding needed to manage that risk and profit from buying and selling put options.
Put options give the holder the right to sell shares of an underlying security at a fixed price, known as the strike price, by an expiration date. The holder of the put option pays the writer of that put option a premium for the right.
If the holder exercises his right and sells the shares of the underlying security, then the writer of the put option is obligated to buy the shares from him. If the holder does not exercise his right before the expiration date, then the option expires and has no value.
Let’s look at a couple examples to see how an investor can profit from either buying or selling a put option.
These basic examples of buying and selling put options highlight the major differences between the two different strategies, and show how an investor can profit, or lose, from both buying and selling put options.
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