January 26, 2007, Newsletter Issue #51: How to buy a put
Tip of the Week
Just as call buying is the most basic options trading strategy you can employ when expecting upward movement in a stock, put buying is the most basic options trading strategy at your disposal when you expect a stock´s value to drop. By purchasing a put, you are investing in the belief that a particular security´s value will fall below a certain price by the option´s expiration date.
Here are a couple of things to keep in mind when buying puts:
Puts can allow you to profit from a downward move in an equity.
Since you are buying an option, you have the right, though not the obligation, to sell the underlying shares at the strike price. Thus, you do not have to own the shares to buy a put. Only if you exercise your put option would you have to go out in the open market, buy the shares, and then sell the stock at the contract (strike) price. Bear in mind that you will incur two stock commissions - one to buy the shares and one to sell them to the put seller.
The simplest alternative to capture a profit is to sell the put for a gain after a decline in the stock.
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