Put Options Explained: Buying & Selling Put Options

hey guys and welcome back to Mike and his whiteboard my name is Mike this is my whiteboard and today we're going way back to the very beginning of options we're going to talk about the put option so a put option is essentially the right to sell 100 shares of stock at a certain strike price so this differs and it's similar to just selling stock outright but we're going to break it down a little bit here so as you can see by the graphic when we buy a put option it becomes more and more profitable as the stock price goes down and again that's because when you're buying a put option it gives you the right to sell 100 shares of stock at that strike price so as you can see here if I buy a put at 110 and the stock price is at 100 if the stock price goes down to 90 and 80 and 70 I still have that right to sell my shares at 110 which is going to mean that that put contract is going to be more and more profitable so when we compare selling stock outright to buying a put when we short stock we have unlimited profitability to zero because the stock cannot go past zero so it's important to keep that in mind and we also have unlimited time just like buying stock when you're selling stock you can hold that stock for as long as that stock is publicly traded so if you have the ability to hold that with the amount of cash in your account then you have unlimited time and therefore you have unlimited time to be correct however with a put option we still have unlimited profitability to zero but we have limited time just like a call option when we're purchasing a put option we have a certain expiration date and by that date the stock is the put option is either going to turn into short stock or it's going to be worthless if it's out of the money so let's break down and put option a little bit further in the next slide here so when we're buying puts it's important to know that we I have a bearish assumption so bearish assumption again is the assumption of wanting the stock to go down in price so when we're buying puts and selling calls as we might have seen in the previous whiteboard we want that stock to go down because it's going to give us the ability to be profitable also when we're buying put options we have negative theta so just like buying call options the option is going decay more and more as expiration nears and that is known as theta decay so when we're buying options we have negative theta decay but when we're selling options we have positive theta decay because when we're selling options the theta decay is good for us and when we're buying options the theta decay is bad for us so it's shown as a negative value when we're buying put options we also have unlimited profitability as long as the stop stock goes to zero because the stock cannot go past zero and it's very similar to shorting stock in that sense so when we buy options we have unlimited profit and when we sell options we have limited profit also when we're buying options we have limited loss and that's because we can't lose more than the debit we paid for that option so if everything goes against us let's say the stock price goes to 120 or 130 that put option is going to be considered out of the money and at expiration it would expire worthless but we can't lose more than the debit we paid as long as we're purchasing options and because of that we have a low probability of profit as you can see on our diagram to the right when a stock price goes up we're not going to be profitable in that put position because we want the stock price to go down and also if the stock price stays right around 100 as you see in this diagram here we're still not going to be profitable because we need the stock price to go down as you can see for us to be profitable when buying a put so when we're buying a put we can only be profitable in 1 out of 3 ways and that's when the stock price goes down but let's go to the next slide and we'll talk about what can happen if we're selling a put so as you can see in the diagram here it's very similar to selling a call it's just flipped on its axis so when we're selling a put our max profit is capped and the max profit is realized if the stock price is above our short strike at expiration so as you can see here we've got a 90 short put that we may have sold and if the stock price is at 100 even if it goes down to 95 94 93 as long as it stays above 90 at expiration we'll be able to reap our full profitability so unlike buying a put option selling a put option we have a bullish assumption so again a bullish assumption is when we want the stock price to go up so buying or selling a put is very similar to buying a call in that regard like we stated earlier when we're selling puts or selling options in general we have positive theta and that's because if we sell an option here and the option decays and decays and decays over time if we can buy it back for a lower amount the difference in that prop that difference in those prices is going to be our profitability so that's why when we're selling options you'll see a positive theta value there additionally when selling options we have limited profit and that's because the most we can possibly make on the trade is the credit that we received in the first place so if we sell a put regardless of where it is as long as it stays above our short strike at expiration we'll be able to keep that profit and you can see that by the horizontal line above the stock price their flip conversely when we're talking about selling puts we have unlimited loss when the stock goes to zero but it's capped as long as the stock goes to zero because as we stated before a stock price cannot go below zero but we don't really know what our loss can be because if the stock price goes below 90 so if it goes to 85 or 80 or 75 we can of course calculate what that loss would be at expiration but we'll never really know it's not defined until we get to that expiration value and for that reason we have a high brow ability of pop a profit when we're looking at short options specifically short puts so because we have that limited profit and tying that together with the unlimited loss we have a higher probability of success which can we can see on the profit chart to the right so if the stock price is above our short put at expiration and the stock goes up we'll be able to keep our credit that we originally received as you can see here additionally just like a short call if the stock price doesn't really move at all we can still be profitable at expiration because all we really need to do is make sure that that strike price and the option that we sold the strike price at stays out of the money so if the stock price hovers right around 100 as you see here we would be fully profitable at expiration if the stock price goes down however past our break-even point that's when we would start to see a loss on the trade and because of that as you can see we've got two out of three ways to be profitable when selling put so let's get two takeaways here and we'll wrap it all together so a put option gives us the right to sell shares at a premium so very on the opposite side of calls we're looking at buying a put so when we're looking at buying a put we have the right to sell 100 shares of stock at a certain strike price so basically if the stock price goes down and I buy a put option it's going to become more and more profitable over time which is what allows me to sell the shares at a premium so with that said buying a put is a bearish strategy so when we buy a put we want the stock price to go down inversely when we're selling a put we want the stock price to go up which is why selling a put is a bullish strategy and lastly longer-dated puts will have higher premium value just like with call options so anytime we have an expiration date the more days until that expiration date that we have to be correct we're going to have to pay a higher premium for when we're buying options and if we're selling options with the longer days to expiration we're going to receive a higher credit for that so thanks for tuning in this has been a put option hopefully you enjoyed it if you've got any questions shoot me an email at support at doe comm or support at tastytrade calm or you can shoot me a tweet at doe trader Mike and until next time have a great night hey everyone thanks for watching our video if you liked this video give it a thumbs up or share with a friend click below to watch more videos subscribe to our channel or go to our website

Channel: tastytrade

Views: 289,777

Rating: 4.6259975 out of 5

Keywords: put options, put options explained, buying put options, selling put options, put options trading for beginners, how to trade options, how to sell put options, how put options work, put option, what are put options, trading put options, stock market, options trading, buying options, tastytrade

Id: FAwDrUqpGUI

Length: 8min 41sec (521 seconds)

Published: Fri Feb 05 2016