put options help?
all of this is very good but what if you dont own the stock at all and just thought it was gonna go down you buy the put option stock goes down put option is now worth more who do you sell it to? who would buy the put? example..
(java) stock at $9.01
(java) $7 put option at $0.25
tomorrow stock (java) goes down to $4.97
(java) $7 put now worth $3
who would pay $3 for a falling stock that is below $5 when you can buy the stock itself for not much more?
some light on this would be great
Answers
381 points
SirCrashton answered 8 months ago …
The put option serves as an "insurance policy" for anyone who originally purchased Java for at least $10.00 or higher. The option gives its owner the right to sell the stock before the option expires for $7.00, regardless of its current price ($4.97 in your example).
You are correct to assume that it would not benefit someone who bought Java for $9.01. Selling the stock outright at the lower price would result in a loss of $4.04/share. Buying and exercising the option would result in a net loss of $5.01/share. ($9.01 stock price + $3.00 option price -- $7.00 guaranteed selling price = --$5.01.
2082 points
alanj answered 8 months ago …
If someone thinks that the stock is going to continue to fall, or go out of business, even though ( in your example) it is below $5, why would they buy the stock? At one point Citi (C), and Merril Lynch where at or slightly below $5. Citi was recently below $1, it has rebounded slightly, it's at $2.62 and heading down again. Anyone who bought at $5 has lost over half their investment if they where to sell right now. And Merril Lynch are no longer in business, anyone who bought this stock at $5 and held on or couldn't find a buyer, lost all of their investment.( Buying puts is a way to short a stock without actually owning it.
Because, not everyone is qualified to do an actual short trade. It's easier to qualify to buy options. ) Anyone who bought puts on Citi when it was $5 (depending on the expiration date and the strike price) have most likely profited. Anyone who bought put options on Merril (when the stock was at $5) are very glad they did. They had an instant windfall.
