Difference between Long Put and Short Put Options
I'm confused with these two options. This is how I remembered these 2 options.
If I want to buy a stock, but I'm afraid that the stock price will decrease in the future, so I will long a put that allows me to sell the stock at the strike price if the stock price in the future.
but what about short put options?
If I want to buy a stock, and I believe that stock price will increase in the future, and I have a put option with me, therefore to maximize my profit, I want to short my put option, so that I could enjoy a profit if it really increases in the future? is that it?
If you short a put you collect the premium. You get something for nothing if you're right and the stock does not fall below the strike of the put.
Here let me make it easier for you...
If you BUY a put, you're PROTECTING a long position on the underlying, in case it goes down. If the stock goes higher, you won't have to exercise and your only loss is the premium. A premium is pretty much like a fee for buying the option contract and that premium goes to the seller of the put option because selling options are riskier with limited reward.
If you SELL a put, let's say in this case with a $40.00 strike price and the underlying is above the strike price and current price is at $55, you're pretty much saying that the underlying won't go below $40.00 in the future. So pretty much, you're bullish on underlying either going up or trading in a tight range. FYI, you will get paid a premium for taking on the risk from the buyer. If it does go below $40.00 you will take losses, and possibly lose the premium if it goes even lower.
Of course, this is the very basic and there are a lot stuff I'm leaving out but for a new person, this should be fairly intuitive.
Selling options is riskier than buying options cause the only profit you can make is the premium you earn for enter into the contact. If you're a buyer of the option, your only loss is the premium, in case the trade goes south and you don't exercise BUT the reward is unlimited because theoretically, stock price can go to infinite.
I personally enjoy the Long putt more than the short putt on the golf course.
I believe the short putt does not take into account the true skill required to get the hole in a ball across long distances.
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