What are Put Options?
When you buy put option assets, you’re a holder of a financial contract that gives you the right, but not the obligation, to sell an asset. These assets include commodities, stocks, or an index. You’ll need to sell the asset at a specified price before the option contract expires.
If you’re new to this, take a look at buying a put option example. This will help you understand how it all works.
Buying put options for income is perfect for those looking to make quick profits. Your main aim is to wait for the price to drop below the strike price, then sell the asset at a higher price for a profit.
One of the biggest disadvantages of put options, though, is that if the asset’s price stays above the strike price, you’ll lose your premium. So, when buying a call or a put what option should you choose? To answer this, you should do your research and assess patterns for the best outcome.
What are the Advantages of Buying Put Options?
Investors have the opportunity to maximize profits while minimizing losses by trading put options. There’s a high level of flexibility that comes with choosing this type of trading.
Let’s take a closer look at the benefits of trading put options.
- There’s high-profit potential. A put options holder can make money if the underlying asset’s price drops below the strike price. The holder can, thus, sell the asset for a profit.
- You can hedge against potential losses. Buying uncovered put options, for example, allows traders to protect themselves against asset price decreases.
- High liquidity makes it easy to buy and sell put options. It’s the perfect option for traders looking to take advantage of short-term market price trends.
- There’s a limit on the risks associated with losses that come with trading. Put options limit the amount lost on the premium paid if the asset’s price increases.
- There’s great flexibility for those buying put options. For example, you can generate income through selling options for profit. Or, you can use put options to protect against losses from purchasing options.