Put options become especially strategic either in hedging or speculative operations for gaining an edge to reach any chosen investment objective. Suppose the stock falls to ₹930, you could think of exercising the put option. For this reason, you could wait until the share price falls to at least ₹920.

When to Sell a Put Option?

This put option contract has given the investor the right, but not the obligation, to sell 100 shares of ABC at $10. If the stock price is at or above the strike price at expiration, the put is “out of the money” and expires worthless. Like put options, a short-selling strategy can also be used to benefit from the fall in the stock’s price. A shareholder of a certain stock feels that the price of that stock can slump soon.

• But if the stock stays at ₹100 or goes below ₹105, the option expires worthless, and your loss is limited to the premium paid (₹2).
• But done prudently, selling puts can be an effective strategy to generate cash, especially on stocks that you wouldn’t mind owning if they fell.
• If the option is exercised on you, you’ll be forced to buy 100 shares of the stock at $40 per share, while the stock is trading in the market at $20 per share.
• These articles have been prepared by 5paisa and is not for any type of circulation.

Short-Term Traders:

This is typically done by the buyer while keeping his option unexercised. So, in this case, the loss of the buyer is the premium paid for buying the put option. If A already holds 100 shares of Ford, then his broker will sell these shares at Rs. 100 strike price. So, to complete the transaction, an option writer will purchase the shares at the same price. On the other hand, the investor who buys a call option contract is required to pay the price – Option Premium. This needs to be paid to the seller or writer of the call option contract.

RISK DISCLOSURE ON DERIVATIVES

Puts can pay out more than shorting a stock, and that’s the attraction for put buyers. Alternatively, if the stock price does not drop below the strike price of ₹1,000, the put option expires worthless. The investor would only lose the ₹7,000 premium paid for the contract. This example highlights how put options can be used strategically to hedge against potential declines or to speculate on the market’s direction. As they must purchase the stock at the strike price but can only sell it at a lower price, this is the case.

If you sell a particular options contract with a similar expiry date and strike price, then you can gain when the price declines. And as per the character of your call option, your losses could be limited or unlimited. An option contract price often rises when implied volatility is high. A put option in share market trader wants to sell when the price is high and buy when it’s low. This is conditioned to when the implied volatility is high but declines significantly.

Writing Put Options

Selling a put seems like a low-risk proposition — and it often is — but if the stock really plummets, then you’ll be on the hook to buy it at the much higher strike price. Typically investors keep enough cash, or at least enough margin capacity, in their account to cover the cost of stock, if the stock is put to them. If the stock falls far enough in value you will receive a margin call, requiring you to put more cash in your account. Put options tend to gain value when the price of the underlying stock falls, making them valuable for hedging or betting on a downturn. A popular strategy involving put options is the protective put, which acts like insurance for investments.

The US options can be exercised anytime prior to the expiration date. But done prudently, selling puts can be an effective strategy to generate cash, especially on stocks that you wouldn’t mind owning if they fell. As you’re placing your trade, you’ll also want to consider the break-even price for your trade, that is, what price does the stock need to reach before you make money on the option at expiration. Any estimates based on past performance do not a guarantee future performance, and prior to making any investment you should discuss your specific investment needs or seek advice from a qualified professional.

When you buy a put option, you bet that the value of the underlying stock will decrease. And when you sell a put option, you place a bet that the value of the underlying stock will increase. Today, this derivative guide will provide you with valuable insights into what are call and put options. BSE Ltd. is not answerable, responsible or liable for any information on this Website or for any services rendered by our employees, our servants, and us. With the Appreciate app you can invest in the US markets with just one click at the lowest costs. We are SEBI Registered Investment Advisor, Authorized Person and IFSC registered Broker.

Users are advised to independently verify details and stay updated with any changes. You promise to buy a stock at an agreed-upon price when you sell a put option. No, there is no minimum investment amount required to trade on the Appreciate app. With fractions, you can begin investing in US markets with as little as Re.

• This article is prepared for assistance only and is not intended to be and must not alone be taken as the basis of an investment decision.
• This ability to magnify potential gains makes put options more attractive to some traders than investing in stocks.
• The distribution of this document in certain jurisdictions may be restricted by law, and persons in whose possession this document comes, should inform themselves about and observe any such restrictions.

When an option loses its time value, what’s left over is the intrinsic value. An option’s intrinsic value is equivalent to the difference between the strike price and the underlying stock price. If an option has intrinsic value, it is referred to as in the money (ITM).

Enhance your skills in Bank NIFTY intraday option trading with our in-depth guide on strategies, put meaning in share market NIFTY options trading techniques, and market insights. A call option can be bought by an investor who believes a stock’s price will increase. A put option could be chosen if they believe the price will decline. Let us take a put option example to understand what is put in share market and the operation of put options.

When it comes to equity call options, the number of shares per contract is typically 100. This means the buyer of the call option contract is capable of exercising that option to purchase 100 shares. Fortunately, the same can be done from the underlying stock at the specified strike price. A put option gives the holder the right, but not the obligation, to sell a stock at a certain price in the future. When an investor purchases a put, they expect the underlying asset to decline in price.

Hopes the underlying stock will trade above strike price at expiration so the option expires worthless and they can keep the premium. Puts with a strike price of $50 can be sold for a $5 premium and expire in six months. In total, one put contract sells for $500 ($5 premium x 100 shares).