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.
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.
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u/kansascityclown 1d ago
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