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The Basics Of Trading Options Contracts – Dummies

Here’s the revenue on the long put at expiration: In this example, the put breaks even when the stock closes at option expiration at $19 per share, or the strike cost minus the $1 premium paid. Below $19 the put increases in value $100 for every single dollar decrease in the stock. trading options. {keywords}.

The benefit on a long put is nearly as good as on a long call, because the gain can be multiples of the alternative premium paid. However, a stock can never go below zero, capping the advantage, whereas the long call has in theory unrestricted advantage. Long puts are another easy and popular method to wager on the decline of a stock, and they can be much safer than shorting a stock ({keywords}).

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If the stock closes above the strike price at expiration of the alternative, the put ends worthless and you’ll lose your investment. {keywords}. A long put is a good choice when you expect the stock to fall substantially before the alternative ends ({keywords}). If the stock falls only a little below the strike rate, the choice will remain in the cash, but might not return the premium paid, handing you a bottom line ({keywords}).

Short put, This method is the flipside of the long put, however here the trader offers a put described as “going short” a put and anticipates the stock rate to be above the strike rate by expiration – {keywords}. In exchange for selling a put, the trader gets a money premium, which is the most a short put can make.

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Stock X is trading for $20 per share, and a put with a strike rate of $20 and expiration in 4 months is trading at $1 ({keywords}). The contract pays a premium of $100, or one agreement * $1 * 100 shares represented per agreement. Here’s the earnings on the short put at expiration: In this example, the brief put breaks even at $19, or the strike price less the premium got.

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Between $19 and $20, the put seller would make some but not all of the premium – {keywords}. The upside on the short put is never more than the premium got, $100 here ({keywords}). Like the short call or covered call, the optimum return on a brief put is what the seller receives upfront ({keywords}).

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