Buying a put equates to short selling? Thereafter, the trader will sell a put at a lower price (compared to his buy put price) to make a profit. Is this understanding correct?
I thought the idea of buying a put was to be able to exercise the put and sell units of the underlying if desired, not sell the put itself. Options are too weird.
Buying a put is equivalent to buying insurance on the short side of your trade. You are not short selling anything. Think of it as "locking in a lower bound" on your maximum loss.
Yes, you can buy a put instead of shorting stock/shares. The put value increases when the stock price goes down, so later you can sell the put at a higher price, not lower. But often this is not a good idea because puts are overpriced and their value decreases if the stock price doesn’t drop fast enough. For this reason many people prefer to sell puts and make money by later buying them back cheaper if the stock price doesn’t drop too much or too fast.
Buying a put gives you the right,but not the obligation to sell the underlying asset at a predetermined price( strike price).. It's an insurance contract,but unlike insurance,there is a liquid market for the contracts.. Make believe you have a 1 million dollar house in California and are terrified of the fire risk. You want to protect the value of your house and find an insurance broker who offers you a contract where you are guaranteed to sell your house at 900k no matter what,but only for the next 2 years.. The question is how much would you pay to be assured if your house burns to the ground,you will receive 900k,I.e. 90 percent of the value of your house.. You may decide that you are good netting 850k if there is a disaster,which means you could offer the broker 50k for the 900k insurance contract... If the broker agrees,you now have protection... Let's say 1.5 years go by and there has been no sign of fire..At the same time,a,you are short of cash and feel comfortable selling your insurance contract back to the broker...you call him up and ask if he would like to relieve himself of his 900k exposure.He may say since there are only 6 months left on the contract and no sign of fire,he would give you 4k...Unforrunately, that number is too low for you and you decline.. 3 months later,a huge brush fire breaks out and the fire is heading directly for your area..You get a text from your broker asking if you still would take 4k for letting him out of the 900k insurance contract.. You look out the window and see a massive ball of flame 1000 yards from the house..Woyld you let the broker out of the contract for 4k,or as the flames head closer,would you ask for 700k or even more??? That's how Puts work
Why thank you...Puts are a funny beast..I have friends who are really successful real estate brokers in the Hamptons( not a measure of intelligence),and when I attempt to explain Puts and the market,their eyes start to roll back in their head with steam coming out of their ears... In their case,I uses Hurricanes and Tsunamis to help out
Not completely correct. Example: 1-You buy a put making a bet for lower prices in a stock. 2-If stock price drops your put will increase in value. 3-You can now sell your put at a higher price to take profit. ***Didn't include any "time-decay" in example. ***Your question seems to imply you will sell a different put at a lower strike price if stock drops. This isn't correct. You have just 1 position to trade. No need to sell a 2nd position to take profit. Just close the put you bought.
Correct. My mistake. The object is to sell the put at a higher price. You wouldn't know that I buy puts for a living, would you? After 15 years, even I still get confused on a Friday.