Put Options Explained for Beginners

what's going on YouTube Chris here from Project option and in today's video we're going to be discussing put options if you didn't catch it I just uploaded a video describing call options in great detail so this is sort of the follow-up to that video but in this video I'll be describing put options instead of call options put options are one of the two primary option types with call options being the other option type so as a put option buyer you have limited lost potential and significant return potential and when you buy a put option you are betting that the stock price is going to decrease since put options increase in price as the stock price decreases as a put option seller you have a limited profit potential significant loss potential but with that you have a high probability of making money since you can make money as long as the stock price remains above a certain price as time passes but we're gonna go through examples of all of these things so be sure to stay tuned in this video I'm going to explain put options to you in great detail and I'm gonna go through numerous historical trade examples so that you can see exactly how put option trades have performed in the past based on various stock price movements that were experienced over the duration of those trades I'm also going to show you exactly what it looks like to buy and sell put options using the tasty works of brokerage software so if you're interested in seeing what it actually looks like to use trading software to make the trades that I'm going to be teaching in this video be sure to stay tuned to get started and to first understand what a put option is I'm going to be describing put options and teaching them from the perspective of a put option buyer if you're familiar with call options or you've seen my call option video you'll know that a call option buyer has the right to purchase 100 shares of stock at the call options strike price it's the exact opposite with put options a put option buyer has the right to sell or short 100 shares of stock at the put options strike price before the option expires in options trading a strike price is the price at which shares will be traded if the put option or the option contract in general is exercised if a contract is exercised that means the person who bought that contract is choosing to convert that option into shares of stock with a put option if they put option buyer exercises the put option that means they are deciding to convert the put option into short shares of stock at the put options strike price now all that means is that if they exercise the put option they will sell 100 shares of stock per put option at the put options strike price as an example let's say we're looking at a put option on Tesla with 57 days to expiration and the strike price of this particular put option is three hundred and fifty dollars let's say the current market price of this option is $19.50 if a trader buys this put option with a strike price of three hundred and fifty dollars and fifty seven days to expiration and they pay $19 and fifty five cents for this option this trader will have the ability to sell 100 shares of Tesla stock at three hundred and fifty dollars per share since they purchased the 350 put option expiring in January 2020 which has 57 days to expiration there are two basic concepts that you need to understand before we move forward the first concept that might be confusing at first but you need to understand is that options are quoted on a per share basis and all that means is that since an option can be converted into 100 shares of stock the options quoted price is not its actual valuation so in this case of looking at a Tesla option with a price of 1955 cents we actually have to multiply that price by 100 to get the options actual value so if we take the options quoted price of $19.50 and we multiply that by 100 we get an option value of one thousand nine hundred and fifty five dollars that means that if I wanted to purchase this Tesla put option for a quoted price of $19.50 I would actually need one thousand nine hundred and fifty five dollars in my trading account to purchase this put option in options trading this is called the option contract multiplier and in 99 percent of the options that you're going to encounter and be looking at the option contract multiplier is going to be 100 which means the option can be converted into 100 shares of stock and because of that when you look at the options price you have to multiply it by 100 to get the options actual dollar value the second and perhaps the most important concept that you need to understand after watching this video is that a put options value is directly tied to its strike price and the relationship between the strike price and where the current market price of the shares who currently are if I owned a Tesla put option with a strike price of three hundred and fifty dollars and Tesla shares are currently trading at three hundred dollars per share my 350 put option is going to be very valuable because the ability to sell shares of stock at three hundred and fifty dollars as opposed to the current share price of three hundred dollars is very valuable more specifically since I can sell shares of stock 50 dollars above the current market price of the shares this 350 put option is going to be worth at least $50 now as I described earlier if the price of the put option is $50 I have to multiply that by 100 to get an option value of $5,000 we can make sense of this price by understanding that if the put option allows me to sell shares of stock $50 above the current share price of $300 and I can convert the option into 100 shares of stock the ability to sell 100 shares of stock $50 above the current market price gives the option a value of $5,000 since a $50 gain times 100 shares gives me a gain of $5,000 now what that means is if I sell shares of Tesla $50 above the current market price and I do it 100 times that means I have a gain of $5,000 as a result this put option has to be worth at least $5,000 in value because if it were worth any less then I would have a risk-free profit that I could make by doing certain transactions with this put option when a stock price is below a put option strike price the put option is said to have intrinsic value and intrinsic value can be understood as the benefit associated with selling shares of stock above the current stock price so in the case of owning a Tesla put option with a strike price of 350 dollars if the stock price is at $300 then this put option has $50 of intrinsic value and options trading it is a law that options must be trading for at least the of intrinsic value otherwise there is a risk-free profit to be made if a put option strike price is below the current share price the put option does not have any intrinsic value because there's no value of selling shares below the current market price when a market participant can simply sell shares of stock at the current share price and be better off than they would be if they exercise the put option and sold the shares of stock at a lower stock price then where the shares are currently trading obviously no one would ever choose to sell something for a lower price than is available to them so therefore if a put options strike price is below the current share price the put option has no intrinsic value and any value that that put option has is considered to be extrinsic value but don't worry I'm gonna describe that in just a moment now that we've gotten some of the basics out of the way how would you put option buyers actually make money on their trades getting back to our Tesla example if I owned a Tesla put option with a strike price of $300 and the stock price is currently at $300 we know that that 350 put option will be trading for at least 50 dollars in value which in actual dollar terms is a $5,000 option if Tesla shares decreased to 275 dollars now the strike price of 350 dollars is 75 dollars above the current share price of 275 dollars and therefore the 350 put option will be worth at least 75 dollars and when we multiply that by the option contract multiplier of 100 we get an option value of $7,500 so if I were to purchase this put option in Tesla for $5,000 and the share price decreased by $25 to 275 dollars that put option would be worth $7,500 at which point I could sell the put option close the trade and I would make $2,500 on the initial $5,000 invested into the option when buying put options the way you make money is to see a rapid decrease in the stock price before the option expires more specifically when you buy a put option you want the stock price to decrease as much as possible and as quickly as possible as that will result in the great price increase in the put option which you can then sell at a later date and pocket the difference between your purchase price and sale price how do put option buyers lose money this is more important to understand because this is the more likely scenario that you're going to encounter when buying put options because when you're buying options in general you have multiple things working against you and therefore you have a pretty high probability of losing money at least on a day-to-day basis understanding that a put options value increases as the stock price Falls it makes sense then that a put options value will decrease as the stock price rises that's because if you have a put option such as the 350 put option in Tesla and Tesla shares are currently at $300 that put option is going to be worth at least $50 because the ability to sell shares at 350 dollars when the stock price is at $300 has to be worth at least $50 per share but let's say Tesla shares increased to 340 dollars now that 350 put option is much less valuable because now that share price of 340 dollars is only 10 dollars below the put options strike price of 350 dollars which means that put option only has to be trading for ten dollars for 1,000 dollars in value if I purchased that put option for $50 or $5,000 in value and Tesla shares increased to 340 dollars and that option price was only $10 or $1000 in value I would have a $4,000 loss for every put contract that I purchased the most straightforward way a put option buyer can lose money is if the stock price increases because if the stock price increases that put options value is going to decrease because if the strike price is above the share price and the share price increases that put options ability to sell shares of stock above the current share price is now less valuable since the strike price is at a smaller premium to the current share price after an increase in those shares but an increase in the stock price is only one way you can lose money when buying put options the second way you can lose money when buying put options and something that will always be working against you is from the loss of extrinsic value time passes as I mentioned earlier an options price consists of intrinsic value but also extrinsic value and as time passes extrinsic value will come out of an option until only intrinsic value remains at expiration for this reason extrinsic value is sometimes referred to as time value since if you look at options with lots of time until expiration they will be trading with more extrinsic value compared to that same option with much less time until expiration let me go ahead and hop over to the tasty works trading platform and look at some options and discuss exactly how much extrinsic value is existing on those options and illustrate to you how the options price will change as expiration approaches and as that option loses its extrinsic value I just opened up tasty works and right now I'm on the Tesla option page and this is accessed by going to the trade tab right here on the left hand side and we know I have Tesla options pulled up because I've entered Tesla into this search box up here and once you do that all of the information that you see on the platform will be relevant to Tesla so this is the option chain for Tesla so these are the different expiration cycles and really quickly I'm going to open up the January 2020 options just to demonstrate to you extrinsic value the put options are going to be on the right-hand side and I know that because it says puts on the right-hand side of the strike prices but look at the option with a strike price of 350 dollars and I go to the right of that if I go to the right that puts me in the put section and if I look at the strike price of 350 dollars this will be the 350 put option as we can see the 350 put that expires in 53 days is trading for about $27.50 and I know that means that this option is actually trading for a value of about two thousand seven hundred and fifty dollars if I click on that I can see that the maximum loss is two thousand seven hundred and thirty-five dollars which demonstrates the fact that if this option is quoted at twenty seven forty the maximum loss potential is going to be 100 times that due to the option contract multiplier of 100 and if we take twenty seven forty times 100 we get a maximum loss potential of two thousand seven hundred and forty dollars so that means if I buy this put option for twenty seven forty and it expires worthless I will lose two thousand seven hundred and forty dollars for every contract that I purchased we can see over here it says ext is minus one thousand four hundred and eighty five dollars so this is telling me that there's fifteen hundred or about fifteen hundred dollars of extrinsic value in this option so since this option is trading for twenty seven forty if we look at the intrinsic value of the option which is the difference between the strike price of three hundred and fifty dollars and the last price of Tesla which is about three hundred and thirty-eight dollars I get intrinsic value that is equal to about twelve dollars on this particular option so if we take fifteen hundred plus the intrinsic value of twelve hundred dollars I would say then that gives us an option price of about twenty seven hundred dollars twelve hundred dollars of this options value is intrinsic which is coming from the difference between the strike price of three hundred and fifty dollars and the stock price of three hundred and thirty seven dollars and sixty cents so the ability to sell 100 shares of stock at three hundred and fifty dollars as opposed to three hundred and thirty seven dollars and fifty cents is $12.50 so that intrinsic value component is going to be about twelve dollars for this particular option and that means the remainder of its price is extrinsic value and we can see right here on the bottom left hand side it says there is about fifteen hundred dollars of extrinsic value in this option and in terms of the options price that means there's about fifteen dollars of extrinsic value in this particular option so all that means is that if I bought this option for twenty seven forty and Tesla was right where it is in 53 days so Tesla was at three thirty seven fifty in 53 days this options price would only be intrinsic since all of this extrinsic value is going to wither away as time passes and that means if I bought this option for twenty seven forty in Tesla's right where it is in 53 days I'm going to lose fifty dollars just from the loss of extrinsic value as time passes I can also illustrate time decay very quickly for you by just looking at the same option at varying amounts of time until expiration so I'm going to go to the January 2022 options which have almost 800 days to expiration and if I look at the 340 put option we can see that this option is trading for about $90 now if I change this column to ext I can actually show you the extrinsic value that exists in each of these options so if we look at the 350 put option with 800 days to go this option is trading with about 82 dollars of extrinsic value now if I go to the 350 put option with 53 days to go we can see that this option has about 15 dollars of extrinsic value and if I go to December 2019 options with 25 days until expiration I can see that the 350 put option with 25 days to expiration has seven dollars and 94 cents of extrinsic value so if we look at the 350 put option across three different time periods we can see that the longer time period gives me the most extrinsic value and the shortest time period gives me the least amount of extrinsic value so this is a quick way of describing the extrinsic value decay so as an option approaches its expiration date it will trade with less and less extrinsic value until it only consists of any intrinsic value that it has at expiration up next we're going to look at some historical put option trade examples so you can see exactly how those trades performed and made or lost money based on changes in the stock price and as time was passing in this example a put option with a strike price of seventy seven dollars and fifty cents and seventy four days to expiration is purchased for $4.95 the maximum loss potential of this position is therefore 495 dollars since a four dollar and 95 cent option actually costs four hundred and ninety five dollars per contract due to the option contract multiplier of 100 so if I buy an option for 490 five dollars the most I can lose is therefore 495 dollars since if the option price goes to $0 I will have lost the entire 495 dollar premium that I paid for that option the break-even price of this position is 70 255 which is the strike price of 70 750 less the $4.95 cost of purchasing that option the break-even price is 72 55 because if the stock price is exactly at $72 and 55 cents when this put option expires the 77 50 put will be worth $4.95 because the put option will have $4.95 of intrinsic value at expiration and as I mentioned earlier an option will only have intrinsic value when it expires early on in this trade we can see that the stock price Falls quickly and the value of the 77 50 put option increases with a quick decrease in the stock price right after purchasing the put option that puts value increases to about 6 dollars and 25 cents at a price of 6.25 cents a trader who purchased the put option for $4.95 would have an unrealized profit of one hundred and thirty dollars per put option the trader could sell to put option for six dollars and 25 cents to realize this 130 dollar profit per put option but of course there's no knowing that the stock price is about to increase and for that reason let's assume that the trader in this case stays in this trade and does not close the position as we can see the stock price teeters around the 7750 price level over most of the remainder of the trade before rallying sharply before the puts expiration date the puts price decreases steadily because as time passes without a decrease in the stock price it becomes less likely that the put option will become significantly more valuable before it expires as there's less time for a big stock price decrease as the option gets closer to its expiration date at expiration the stock price is above the put strike price of 7750 and the put expires worthless because it has no intrinsic value meaning there is no value in the puts to sell shares of stock for seventy seven dollars and fifty cents since a trader could simply sell shares of stock at the higher market price of the shares without the use of the option if a trader bought the put option for $4.95 and it expires worthless they will realize a loss of four hundred and ninety five dollars per put option that they purchased this example is a great demonstration of the extrinsic value decay as time passes as we saw a steady decrease in the options price as the stock price did not decrease and time was passing let's now look at a put option purchase that makes lots of money in this example a put option with a strike price of three hundred dollars and sixty three days to expiration is purchased for fifty two dollars and seventy cents which gives the trade a breakeven price of two hundred and forty seven dollars and thirty cents the maximum loss potential of this position is five thousand two hundred and seventy dollars per put contract purchased the put is so expensive in this example because the strike price is way above the current stock price which means the put has lots of intrinsic value at the time of entering the trade as we can see the stock price decreases steadily over the entire duration of the trade and is well below the break-even price of two hundred and forty seven dollars and thirty cents at the time of expiration at expiration the stock price is around two hundred and fifteen dollars which means the three hundred put option has eighty-five dollars of intrinsic value because the three hundred foot has the ability to sell shares of stock eighty-five dollars above the share price of two hundred and fifteen dollars with an initial purchase price of 50 to 70 and increase in the puts value to eighty-five dollars means the trader has a gain of three thousand two hundred and thirty dollars per put contract purchased or a sixty one percent return on the initial five thousand two hundred seventy dollar cost of the option this trade example demonstrates the attractiveness of purchasing put options as opposed to shorting 100 shares of stock when shorting 100 shares of stock you have theoretically unlimited loss potential since there's no limit to how much a stock's price can increase when buying a put option it doesn't matter if the stock price it goes to a thousand or two thousand or whatever the number is going to be if the stock price is a the put options strike price the put option will expire worthless which means when you buy a put option you have limited loss potential which compared to shorting shares of stock is much more attractive than having unlimited loss potential in theory but remember that when you buy a put option you need the stock price to decrease in your favour and in the time period that you've selected based on the number of days to expiration before your put option expires because of that buying put options is a low probability trade which means when you buy put options there is a greater than 50% chance that you are going to lose money on that transaction because of the fact that you have to time the decrease in the stock price and you have to be correct about the magnitude of that stock price decrease as well to show you what buying put options looks like on real brokerage software I'm going to open up the tasty works trading platform and I'm going to actually purchase a put option so you can see what it looks like to actually set up a put option purchase and execute that trade therefore putting that position in your portfolio and then I'm also going to show you how you can close that exact same position once you've purchased the put option at this point I'm going to show you exactly what it looks like to actually purchase a put option using the tasty works brokerage platform for this I'm going to look at a different stock than Tesla and for this I'm going to go to IWM which is the Russell 2000 ETF to purchase a put option or to purchase any option for that matter you have to click on the ask price so the bid price is the highest price someone is willing to pay for an option and the ask price is the lowest price someone is willing to accept for selling an option and since I want to buy an option I have to go to those who are willing to sell that option which means I am going to be clicking on the ask price so I'm gonna go ahead and look at the 160 put option this is just an example and it's not a trade recommendation by any means but I'm just going to go to this 160 put option and as I can see the quoted price is around $1 and 85 cents which I know this means the option cost is 185 dollars so if I click on the ask price of 185 on the 160 put option this sets up a trade to potential we trade this option this is not executed yet this is just setting it up so that I can review everything and look at all the details relevant to this particular trade and then from there I can decide whether or not I want to execute the trade so as I said this option is trading for one dollar and 85 cents and if I look at the maximum loss down here that says 185 dollars now that's just illustrating the option contract multiplier and all that means is that if the option price is quoted at one dollar and 85 cents I have to multiply that by 100 to get the options actual cost on a per contract basis let's say I want to buy this option for one dollar and 85 cents I can click this little lock with one dollar and 85 cents selected and this will make it so that this price does not change as this option price changes so if I click review and send this will just review everything with this order and it says the estimated trade cost is 185 dollars and that's because I'm buying an option for one dollar and 85 cents plus the Commission's and estimated fees I get a total trade cost of 186 dollars and 14 cents so that's the amount of money I need in my account to actually purchase this option so if I click send order I'm anticipating that this order will be filled immediately because I'm trying to buy an option at the ask price and whenever you're trading options you will typically get filled immediately if you buy at the ask price or if you sell at the bid price but now it's just changed but let me see what happens if I try to buy this for 185 so I just got filled on the IWM 160 put that expires in 25 days and I bought that option for a price of $1 and 85 cents I can go and look at this position in my portfolio by going to the positions tab and if I open up IWM we can see that I own 1 put contract that expires in December of 2019 and this has 25 days to expiration the strike price is 160 and this p indicates that it is a put option so the trade price is the price I purchased or entered the trade for and this - 185 which means I paid one dollar and 85 cents for this option the mark or the current price is one dollar and 85 cents and that gives me a pl open of $0 since the option has not changed prices since I bought this position so I'm gonna go ahead and actually close this put option because I do not want to actually hold it and I do that by clicking on it to highlight the contract I right click hit closed position and this will set up a sell order to sell this 160 foot contract expiring in 25 days and if I already own one contract if I sell one contract those two positions will offset and I will basically have whatever profit or loss I have between the difference in my purchase price and sale price so I'm gonna go ahead and try to sell this for $1 in 84 cents and if I do that click send order I just got filled from $1 at 84 cents which means I lost $1 on this trade I bought the option for a hundred and eighty-five dollars and I sold it for a hundred and eighty four dollars therefore taking a $1 loss on that transaction I was fully expecting to lose a small amount of money on this trade just to show you what it looks like to actually enter and exit a put option purchase so hopefully this clears up the common misconception that when you buy an option or when you trade options in general since they do have an expiration date a lot of beginner traders think that you have to hold the position to expiration but hopefully this demonstrates that when you trade options just because an option has an expiration date doesn't mean you have to hold until the expiration date you can close a position whenever you want and all that you have to do is execute the opposite trade that you did when entering the position so for buying a put option to close that position you just have to sell the same exact put option and with the same amount of contracts and when you sell that option you will secure the profit or loss that you have on that transaction at that particular moment and based on whatever your entry and exit prices were at this point we've talked a lot about buying put options as a trading strategy so let's switch gears and talk about selling put options or shorting put options as a trading strategy as essentially when you short put options you're taking the opposite stance as someone who buys a put option and when you short a put option meaning you sell it without owning it first and you sell the option as an opening trade your goal is to buy back the put option at a lower price in the future as we know a put options price will decrease if the stock price increases or if the stock price does not decrease by too much as time passes so when you short a put option you are betting that the stock price is going to increase or at least remain above the put options strike price as time passes as those two scenarios will result in a decrease in the options price and therefore you'll be able to buy back the put option at a lower price in the future and you will secure the profit that you have on the trade at that moment let's look at some historical trade examples so you can see exactly what I mean by this in this example a trader shorts a put option with a strike price of one hundred and fifty dollars and thirty seven days to expiration for eight dollars and eighty-eight cents this means the traders break-even price is the short puts strike price of one hundred and fifty dollars less the eight dollar and eighty eight cent premium received which comes out to one hundred and forty-one dollars and twelve cents if the stock price is above one hundred and forty one dollars and twelve cents at expiration the 150-foot will be worth less than the initial sale price of eight dollars and eighty eight cents which means the short put trader will profit when selling options you adopt a sell high buy low mentality which means you want the option price to decrease after shorting the option a put options price decreases when the stock price remains flat or increases over time as the put option will steadily lose its extrinsic value and generate profits for a short put trader in this example the stock price increases steadily and the 150 puts value slowly decays at expiration the stock price is above the 150 put strike price which means the put has no value at expiration since the option has no intrinsic value if the trader held this position to expiration they would make eight hundred and eighty eight dollars per put option that they shorted as they sold the put for eight dollars and eighty-eight cents and the put expired with a value of zero dollars which is another way of saying the put worthless as I mentioned earlier selling put options is a high probability strategy meaning that when you sell a put option you have a greater than 50% probability of making money in theory and that's because when you sell a put option you have the extrinsic value decay in your favor which means as time passes and as the extrinsic value comes out of that put option that is going to benefit you as an option seller because when you sell options you want the option price to decrease and one of the ways that happens is through the extrinsic value decay as time passes the second way a put options price will decrease is that the stock price increases as put options across the board become less valuable as the stock price increases let's go ahead and look at a short put trade that ends in disastrous fashion so I can illustrate to you exactly how much risk is present when you do sell a put option in this example a put option with a strike price of one hundred and ten dollars and forty nine days to expiration is sold for four dollars and twenty cents this gives the trade a breakeven price of one hundred and five dollars and eighty cents the maximum profit potential in this case is four hundred and twenty dollars because the option was sold for four dollars and twenty cents and the lowest value the option can reach is zero dollars unfortunately the stock price gap significantly lower and was about fifteen dollars below the put strike price at expiration and that means the put option was worth about fifteen dollars at expiration since if the put option has fifteen dollars of intrinsic value at expiration that means the put will be worth just about fifteen dollars since at expiration no extrinsic value will exist in the options price with an initial sale price of four dollars and twenty cents and increase in the puts value to fifteen dollars translates to a loss of one thousand eighty dollars per put option sold and the fact that the trade lost one thousand and eighty dollars but had a maximum profit potential of four hundred and twenty dollars demonstrates the riskiness of selling put options by themselves it also explains why a trader will have to put up a significant amount of margin to initiate the trade the loss in this particular example wasn't too bad but it does illustrate that when you sell put options all by themselves or so naked options the lost potential is going to be more than the profit potential on that particular trade and because the profit potential is less than the amount you can lose selling put options is a high probability strategy really quickly I'm going to show you what it looks like to use real brokerage software and short a put option meaning you're selling a put option as an opening trade and that means that you are selling a put option that you do not already own really quickly I'm going to show you exactly how you can sell a put option as an opening trade now as we can see here on this trade page there are no indicators that tell me I have any positions on and that's because I do not have any positions on in IWM so to sell an option you're going to click on the bid price since the bid price is the highest price someone is willing to pay for an option so let's say I wanted to sell this one 59 put option in IWM since the strike price is 159 and IWM is currently at 160 150 this options price is 100% extrinsic and I can verify that by looking at the price of around one dollar and fifty one cents and looking at the ext column that I have opened up here and the ext column says one dollar and fifty two cents so this means that this option has one dollar and fifty one cents of extrinsic value and that is the entire price of the option because this options price is currently about one dollar and 51 cents so to initiate a sell order I'm going to click on the bid price for the 159 put and this puts a red box around the contract and on the right hand side that says s1 and this is indicating to me that I am looking at selling one of these 159 put options that expire in 25 days and this put option is on IWM which is the Russell 2000 ETF so I'm gonna try to sell this option for one dollar and fifty cents and if I sell this option for one dollar and fifty cents that means I will collect 150 dollars and the best-case scenario in this trade is that the option price goes to $0 at which point I will secure a profit of 150 dollars for every contract that I sell so I'm gonna go ahead and actually decrease the price to 149 since the mid price or the midpoint between the bid and ask is actually 149 so I'm gonna hit review and send and this is saying the estimated trade cost is a $149 credit and that means since I'm selling this option I will collect the credit and when I eventually buy back this option to close the trade I will have to pay out an amount to close that option and whatever the difference is between my credit and debit that will be my P&L on this trade so the estimated buying power effect this is important to know because as I mentioned in this video when you sell an option you have significant loss potential because for example if IWM went to $0 then this option would have a hundred and fifty nine dollars of intrinsic value and therefore this option would be worth one hundred and fifty nine dollars and if I multiply that by 100 that would give me a value of the option of just about sixteen thousand dollars so I can see the maximum loss potential is just about sixteen thousand dollars and that's because if IWM goes to zero and the option price goes to fifteen thousand nine hundred dollars and I've collected a hundred and fifty dollars for it my maximum loss potential will be fifteen thousand nine hundred dollars less the premium that I collected which in this case is one hundred and forty nine dollars now since the loss potential is so significant I have to put up what is called a margin requirement so the estimated buying power effect is stated to be just under three thousand dollars which means if I want to sell this put option without any protection against it I need three thousand dollars in my account to initiate this trade now I'm not gonna be able to get filled at one forty nine because as we can see here the price has moved a little bit lower so I'm gonna have to adjust my price to 146 I'm gonna go ahead and click review and send and send order so I have not yet been filled and that's because the ask price is 146 and my order price is 146 and if you try to sell an option at the ask price typically you will not be able to get filled because you will bit you'll be able to get filled immediately at the bid price or somewhere in between the bid and ask but typically you will not be able to sell an option right at the ask price so I'm going to go to positions I'm gonna right-click on this working order I'm gonna hit replace I'm going to decrease the price to 145 review and send send order and now I have been filled on this trade for one dollar and forty five cents now as we can see here there is a box around the bid price of the 159 put and it says negative one now this means that I have an open position in this put option and I have a short position as indicated by the negative number of contracts so the negative one means I am short one of these 159 put options which means I sold one of these put options as an opening trade which means I am short this option someone to go to my positions tab and I can see here it says negative 1 on the 159 put that expires in December 2019 with 25 days to expiration so the trade price is what I entered the trade for and that's one dollar and forty five cents and the mark is one dollar and 48 cents which gives me a P&L open of negative three dollars that's because since the option price increased by three dollars from my entry price I have a three dollar loss so if I go ahead and try to buy this option for one dollar and 48 cents I will secure the three dollar loss and I'm gonna go ahead and do just that so to do that I just click on this IWM option right click hit closed position and this is going to queue up an order to close this position and I'm gonna go ahead and lock this in at 149 review and send and send ordered so I have just closed this position for one dollar and 49 cents and since my initial sale price was $1 and 45 cents I took a four dollar loss on that transaction but as I did before I was fully expecting to take a small loss on this position because when you enter an exit an option position in just a few minutes typically you're gonna take a loss because you're going to lose the bid-ask spread but in this case the option price actually increased by a very small amount so hopefully this was helpful in demonstrating to you how you can sell a put option with owning it first or in other words shorting a put option and more importantly how you can close that position at any time by simply buying back the put option that you initially sold instead of buying or selling puts all by themselves traders often implement put spread strategies and that means that you are trading a put spread as opposed to buying or selling a put all by themselves I have complete videos that I've dedicated to buying put spreads and selling put spreads which you can find in the links in the description so if you're interested in learning about the put spread strategies I would highly encourage that you watch those videos because you will learn about how to mitigate some of the downsides that we've discussed in this video as they relate to buying and selling put options all by themselves if you enjoyed this video please give it a like and share it with somebody that you think would also benefit from the content that I've discussed within this video I'd also love to hear from you so please leave me a comment down below this video I'm Chris from project option and I will see you next time [Music] you

Channel: projectfinance

Views: 117,035

Rating: 4.8305678 out of 5

Keywords: put options, put options explained, put option basics explained, options trading basics, options trading, buying put options, selling put options, long put option strategy, short put option strategy, selling puts, buying puts, put intrinsic value, put extrinsic value, projectoption, tastyworks, options trading examples, trade examples, put option, stock market, options trading for beginners, options basics

Id: oXQ1b0rA0r4

Length: 41min 11sec (2471 seconds)

Published: Wed Nov 27 2019