What is the Put option?
Put is a type of financial instrument known as a derivative. In principle, it is an agreement between two parties to exchange shares for a agreed price in a certain period of time. The replacement of the shares is optional and the owner of the possibility decides whether this will happen.
The agreed price of the stock exchange is called the strike price and the date when the possibility expires is the expiration date. The amount of money needed to buy one is called a bonus. If there is an exchange, then it is said that he applied the possibility. These options are always an agreement that you can sell shares at agreed prices. They come in European style and American style and are sold on European and northern American exchanges. European options can only be applied to the expiration date, while the American style option can be performed at any time during your life.
There are two investment styles when investing in this type of tool. Conservative investmentTiři buy one on stocks, which is part of their portfolio as an insurance against a large decline in the price of the shares. For example, if a conservative investor owns shares in XYZ and is concerned that the stock price may fall, but is not willing to sell shares, he can buy an option to ensure that if XYZ shares are to drop prices dramatically, the investor could sell shares for a strike price. If XYZ shares are sold for $ 45 in USD (USD), it could be purchased with a strike price of $ 43.
At any time during life, the owner can sell shares for $ 43 per share. This would only happen if the stock price dropped below this amount. This option will depend on a series of variables, but will be much less than $ 43 USD, usually in the range of $ 2 to $ 2. This example is only relevant to American style.
The speculative investor buys or sells opportunities without the ownership of the underlying shares. The sale of one is also called "writing" and the seller is said to be Jehabout the writer. If a speculative investor thinks that Xzy's shares will increase value, the investor will be the writer since the price of XYZ's shares increases value, the possibility will reduce the value. If a speculative investor thinks that XZA shares will be reduced, the investor will be the buyer, because if the company's stock price reduces value, PUT will increase.
The use of these tools allows a speculative investor to dramatically increase the profit that earns compared to purchases in stocks or society itself due to the leverage effect into which it is built -in. For example, if an investor thinks that XYZ shares that are currently selling for $ 45 per share are likely to drop to $ 43 per share, an option of $ 45 could be purchased. If the price actually drops to $ 43, the option value will increase to $ 2 or maybe even more. However, if the stock price does not fall as expected, then the investor will lose the entire investedfor the amount.