A put option is a derivative contract that lets the owner sell 100 shares of a particular underlying asset at a predetermined price on or before the expiration date. In this article, we will discuss, "Buying a Put Vs Selling a Put: What are They?" Let's get started.
Buying A Put Option
Buying a long put is typically indicates a bearish expectation for the market. A large downward movement in the price of the underlying asset that crosses the put strike on or before the contract's expiration date is required for a long put contract to be profitable. In order For a long put to truly have intrinsic value for the owner, the put must be deep in-the-money (ITM) well before, or at, the contract's expiration date. If the option's price is higher than what was paid up front to buy it, the put buyer will make money.
Selling a Put
An option seller who sells a put assumes the put buyer's opposite speculation. Where one makes money, the other loses money, and vice versa. So, a put seller's market expectation is neutral-bullish. Therefore, they want the stock price to remain above the put strike, in which case they would keep the premium collected upfront for selling the option. This would be their profit if the contract expires worthless (OTM).
Buying a Put Vs Selling a Put
You bet that a stock will trade lower before the option expires when you purchase a put option.
You can place one of two kinds of bets when you sell a put option. Closing out an existing position that you had purchased, at a profit or a loss, is the first step in selling a put option. For instance, you could sell your put option and keep the $5 per contract profit if you purchased an IBM Dec 100 put at $4 per contract and the price increased to $9.
You can also sell naked puts, though. This means you're opening a new position rather than closing out a previous one you have purchased when you sell a put. If you sell a naked put, you are giving the buyer of that put the right to "put" the stock to you at the strike price.
For example, if you sell a naked IBM Dec 100 put, you may be forced at any time to buy IBM stock at $100 per share. However, if IBM never trades below $100 before your December option expires, you won't have to buy the stock and can simply keep the premium you received from the sale of the option. In other words, selling a naked put is the same thing as betting that a stock will go up, not down.
Buying a Put Vs Selling a Put: What are They? - Hopefully, this article can help you to get some knowledge.
