by Dawn Pennington 09/12/08
Today's market could make any investor squirm.
More Trading Ideas
Don't sit on the sidelines and hope for better days to arrive -- make the best out of bad times by using the options markets to make money in any type of market!
To play the bearish side, you can either buy put options or write (i.e., sell or short) call options. Just like buying a call option, purchasing a put means paying up front to enter the trade. When you initiate a long put position, you are expecting the underlying instrument to experience a drop in value, which, in turn, would result in the value of your options going up.
Buying puts carries the same benefit as buying calls -- purchasing options in general gives you rights but not obligations, and in the case of a long put, you obtain the right to sell the underlying security at the listed strike price. (By comparison, with long calls you gain the right to buy stock at the option's strike price throughout the life of the contract.)
The risk-versus-reward scenario is similar as well, in that the most you can lose on the trade is what you invest -- the worst that could happen is that the underlying instrument increases in value and makes the value of your put option go to zero.
Let's say that you purchased an XYZ 25 Put and the stock dropped to $20. You would be able to "put" shares to someone who was short the option at $25, even though the market value was $5 less than the strike price. This, minus your initial investment and commissions, serves as your profit. Or, remember that you are not obligated to sell shares; in that case, you could sell your puts at market and collect the premium outright.
Read This Before You Buy Another Stock
A savvy stock position can start with a single options trade.
This technique can help you breathe a sigh of relief as it aims to relieve a 'choking' portfolio.
If you are familiar with buying calls and puts, we'll show you how to buy them even cheaper.
Anatomy of a Stock Option Ticker
Option tickers may look like a bowl of alphabet soup to you, but each letter means something.
