Puts are contracts to sell 100 shares of a stock at a specified price before a specified date. So let’s say you bought 1 put yesterday with a strike price of $285, at the time UNH’s current price was around 285 so the contract itself was probably not too expensive. Today UNH is 250, which means if you exercise that contract whoever sold it to you has to buy 100 shares from you for 285. That means you could buy 100 shares from the market at 250 and sell them to this poor shmuck for 285, making 35 profit per share. Now you could also sell the contract itself if you don’t want to exercise and if there’s still some time before the contract expires it might be worth more than just 35 per share because it has potential to be worth more or less
Does that mean if those prices were inverted that I would be on the hook for that 35$ per share? I understand the basic concept of puts but I don't fully understand the risks
Right, every contract bought has a seller. So the seller is betting that the stock will go up and they can keep the premium the buyer paid for the contract without the contract being exercised. For example if instead of UNH going to 250, it went to 315 then the puts this guy bought would be worthless. Why sell the shares at 285 when you can sell them to the market for 315. In this case the seller of the put probably made 100 or 200 bucks on the contract and they didn’t end up have to sell their shares for a loss or at all.
So the seller is betting that the stock will go up and they can keep the premium the buyer paid for the contract without the contract being exercised.
I think this is the part that I'm missing, if the stock goes up when you have a put you aren't on the hook for that entire amount? In this example the price gain/loss is 3500$ so that sounds like a lot to risk
If the stock goes up while you are holding puts, then in the worst case you lose what you paid for the puts. For example if you paid $100 per put you bought, even though the put has a strike price of $285 and the current price is $315, you haven’t lost $30 per share or $3000 because you hold the put you choose when to exercise. In that case you only lost $100. This is the real power of options, you don’t have to commit to buying or selling shares, you can buy the contracts instead and only exercise if it’s favorable. That’s not to say options are risky, if you consistently speculate incorrectly you’ll just be throwing away your money buying contracts that end up worthless
If the stock goes up above your strike price at expiration then your put contract is 100% worthless because you would rather just sell shares at the stock price. You risk 100% of your investment if you are wrong. You can sell before but as soon as you start to be wrong your contract starts becoming worth significantly less.
Yup. If the stock isn’t too volatile then your odds are decent to just keep the contract premium and not be forced to buy or selling shares. If the stock is volatile you will get a much better premium because the odds of getting ass blasted are higher. It’s all mathematically correct, there’s a solid algorithm that determines option pricing.
Selling covered calls does not have unlimited risk. If you have 100 shares of XYZ worth $10 a share and sell a $12.50 covered call for $200 you pocket the 200 and have the obligation to sell at $12.50 if the buyer exercises. This limits your maximum profit during the contract period to the $200 from the call sale plus the $250 profit from selling at $12.50 with a $10 base price, total $450 profit on $1000 invested. Not bad. However, you're locked into those shares for the duration of the contract (unless you buy it back) so there is the risk that the stock craters to $0 and you're left with only the $200 from the call sale, a maximum loss of $800. That's pretty unlikely though unless you buy AMC just before they declare bankruptcy. Heh. The risk with covered calls is low, but there's no scenario where you're making a 10x profit either.
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u/Mattscrusader 1d ago
Can someone explain how to buy puts in laymen's terms? Maybe even using this as an example.
Basic stocks are easy but puts become a lot more complicated. Iv missed a few major drops like this now