I'd like to purchase put options. Just need some advice. I've never really traded options that much. The current price on the underlying stock is $32. I want to buy some put options in august but I'm confused. I'm looking at $10 puts in august as opposed to $30. I know there is greater risk on the $10 because it's further outside of the money. Any recommendations would be great....do you think I should stick closer to the money?
You haven't provided enough info to give you a meaningful answer. Are you looking to hedge a long stock position or to speculate on the down move. If looking to speculate then what is your price target, time frame (although you did mention Aug puts)?
In your example of a $32 stock, the $10 puts will apreciate much slower than the $30 puts. From Investopedia: An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time. This is the opposite of a call option, which gives the holder the right to buy shares. Investopedia explains Put Option A put becomes more valuable as the price of the underlying stock depreciates relative to the strike price. For example, if you have one Mar 08 Taser 10 put, you have the right to sell 100 shares of Taser at $10 until March 2008 (usually the third Friday of the month). If shares of Taser fall to $5 and you exercise the option, you can purchase 100 shares of Taser for $5 in the market and sell the shares to the option's writer for $10 each, which means you make $500 (100 x ($10-$5)) on the put option. Note that the maximum amount of potential proft in this example ignores the premium paid to obtain the put option.
strictly speculate. The underlying security just did a reverse stock split. I think there is a pretty good chance it will take a dive.
For a two-month time frame August is a bit too far out, if you ask me. Going further out in time you reduce time decay, but the downside is less sensitivity to price movement. The further OTM you go the more leverage you get. So the strike really depends on how much leverage you want and what your taget is.