Understanding Options 2E by Michael Sincere

Author:Michael Sincere [Sincere, Michael]
Language: eng
Format: epub
Amazon: B00GWSXX8U
Publisher: McGraw-Hill Education
Published: 2014-01-10T08:00:00+00:00

Now that you’ve been introduced to buying calls, you’re going to learn how to buy puts, another speculative strategy. Once again, it’s essential that you learn this strategy even if you never decide to use it. For your information, buying puts is a mirror image of buying calls (although the reason for buying or selling is different).

PART FOUR

HOW TO BUY PUTS

15

How to Choose the Right Put Option

If you believe that the market or your stock is going to drop in value, you have several choices. First, if you are long a stock, you can sell it to avoid future losses. Another choice is to sell stocks short. And your third choice is to buy puts. (You can also say you are long puts.)

When buying puts, you often profit when the underlying stock price goes down. For example, many years ago, housing stocks weakened after doubling or tripling in price. Instead of selling the housing stocks short, you could have bought puts on them. As the housing stocks continued to fall, your puts would have become more valuable.

Sometimes you get the feeling that put buyers get no respect. Maybe it’s because most investors have been programmed to go long and stay long. Generally, the public has shied away from shorting strategies. After all, shorting means that you are thinking negatively about stocks. Or perhaps it’s because so few people understand how and why anyone would want to short stocks.

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