Put Options Explained

You buy a PUT options to make money when the market is going down or shorting the market some may say, and you think it will continue its down trend.

Check the stock to see if it meets at least some if not all the following criteria:

Make money with covered calls

Make Money By Buying A Put Option To short The Market

After above analysis, check with online stock option brokers, make sure the put option for that particular stock has more than 100 open interest, otherwise it would not go anywhere. Once confirmed ok, then place an order for PUT option with your broker

  • Check the economic calendar page to see if the stock is reporting any earnings. If so, wait until it's over as this can affect the price.
  • select the Put side of option premium price
  • select the required strike price. In or At The Money is better, as the stock price more or less match the option price
  • select BUY TO OPEN , using the ASK price
  • select the number of options ( remember 1 contract =100 shares)
  • select stock expiration date to be minimum 4 -6 months away, as you want more time to be right.
  • You can close the trade anytime you want once you are in profit by placing a SELL TO CLOSE order, once the stock price has risen.

Note, if you are wrong and it's going the wrong direction, rather than leaving it till expiration day where you will lose 100 % of what you paid for, you can place a SELL TO CLOSE order, for which the premium ( quite small now) will be credited to your option account.

Selling Put Options Explained - Make money when you think price is going to go up

Unless you are very confident that a trend reversal is imminent, like seeing double bottoms, gap down and close near or at low with big volume and went up the next day, price and indicators divergence delta or market time and price projection meet dead on, I would play safe with this strategy as there is no way out to protect yourself if you are wrong using this strategy on itself and once you placed a trade, apart from the premium received.

This PUT option trading is the opposite of above. You do this by selling someone the right to sell the option to you, thinking the stock price will rise. You then are obliged to buy from the buyer.

As you are selling, you want the buyer less time to be right, so you place an order with your options broker and

  • select PUT side option strike price
  • select OUT OF MONEY (lower )strike
  • select SELL TO OPEN
  • select expiration day to be 1 month or less.
  • select the number of contracts

You keep the premium regardless of what will happen. Option price decays exponentially during the last month which means even as Stock Price rise, option price may not rise but fall. If you are wrong, buy back the PUT option ( which should be quite cheap by this time) before it expires so that you don't need to buy the stock at the huge loss if the stock price dropped significantly.

Other Put Options Strategies

There are many other stock options trading strategies which can be used in conjunction with SELLING PUTS, but buying CALLS and buying Puts options are the simplest way of making money whether stock is going up or down.

If you are interested in learning more using other options trading strategies, I recommend reading these two options trading books from Guy Cohen. Not that I am biased, because I have been to his seminar, but it's well written, even a beginner can understand. Both books are available in UK from Amazon via the links.

The Bible of Options Strategies: The Definitive Guide for Practical Trading Strategies

Options Made Easy

These Options books are also available in US from amazon.com . Click on the following links.

Options Made Easy: Your Guide to Profitable Trading (2nd Edition)

The Bible of Options Strategies: The Definitive Guide for Practical Trading Strategies

Stock Options Trading | Home Page| Call Options | Covered Call Options | Put Options

Make money with covered calls