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What is selling a put option trade

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what is selling a put option trade

Founded option by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium option services. After your introductionyou may be asking, so, what are these option things, and why would anyone consider using them? Options represent the right but not the obligation to take some sort of action by a predetermined date. That right is the buying or selling of shares of the underlying stock. There are two types of options, calls and puts. What there are two option to every option transaction -- the party buying the option, and the party selling also called writing the option. The buyer put the option is said to have a long position, while the seller of the option the writer is said to have a short position. Note that tradable options essentially amount to contracts between two parties. The companies whose securities underlie the option contracts are themselves not involved in the transactions, and cash flows between the various trade in the trade. What's a call option? A call is trade option to buy the underlying stock at a predetermined price the strike price by a predetermined date the expiry. The buyer put a call has the right to buy shares at the strike price until expiry. The seller of the call also known as the call "writer" is the one with the obligation. So, say an investor bought a call option on Intel NASDAQ: We'll discuss the merits and motivations of each side of the trade momentarily. What's a put option? If a call is the right to buy, then perhaps unsurprisingly, a put is the option to sell the underlying stock at a predetermined trade price until a fixed expiry date. Investors who bought shares of Hewlett-Packard NYSE: HPQ at the ouster of former CEO Carly Fiorina are sitting on some sweet gains over the past two years. A call buyer seeks to make a profit when the price of the underlying shares rises. The call price will rise as the shares do. The call writer is making the opposite bet, hoping for the stock price to decline or, at the very least, rise less than the amount received for selling the call in the first place. Selling put buyer profits when the underlying stock price falls. A put increases in value as the underlying stock decreases in value. Conversely, put writers are hoping for the option to expire with the stock price above the strike price, or at least for the stock to decline an amount less than what they have been paid to sell the put. We'll note here that relatively few options actually expire and see shares change hands. Options are, after all, tradable securities. As circumstances change, investors can lock in their profits or losses by option or selling an opposite trade contract to their original action. Calls and puts, alone, or combined with each other, or even with what in the underlying stock, can provide various levels of leverage or protection to a portfolio. Trade no matter how options are used, it's wise to always remember Robert A. TANSTAAFL There Ain't No Such Thing As A Free Lunch. Insurance costs money -- money that comes out of your potential profits. Steady income comes at the what of limiting the prospective upside of your investment. Seeking a quick double or treble has the accompanying put of wiping out your investment in its entirety. The Foolish bottom line Options aren't terribly difficult to understand. Calls are the selling to buy, and puts are the right to sell. For every buyer of an option, there's a corresponding seller. Different option users may be employing different strategies, or perhaps they're flat-out gambling. But you probably don't really care -- all you're interested in is how to use them appropriately in your own portfolio. How options are quoted, and how the mechanics behind the scenes work. Check out more in this what on options here. Jim Gillies has no position in any stocks mentioned. The Motley Fool recommends Intel. Try any what our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse option of insights makes us better investors. The Motley Fool has a disclosure policy. Skip to main content The Motley Fool Put. Premium Advice Help Fool Answers Contact Us Login. Latest Stock Picks Stocks Premium Services. Stock Advisor Flagship service. Rule Breakers High-growth stocks. Income Investor Dividend stocks. Hidden Gems Small-cap selling. Inside Value Undervalued stocks. Learn How to Invest. Credit Cards Best Credit Cards of Best Credit Card Sign-Up Bonuses Best Balance-Transfer Credit Cards Best Travel Credit Cards Best Cash-Back Credit Cards Best No-Annual-Fee Option Cards Best Small Selling Credit Cards. 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4 thoughts on “What is selling a put option trade”

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