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Purchasers of put options acquire the right, but
not the obligation, to purchase a particular stock at a specified
price (the strike price) at any time before the option
expires.
The purchaser of a put option makes money when
the price of the underlying stock goes down. The purchaser of a put
option limits their risk to the premium paid plus the commission
fees.
Sellers of put options must commit to buy an
underlying stock to the options purchaser for the strike price if
called up on to do so before the option expires. This is called
exercising the option.
A put option is in the money if the
underlying stock price is lower than the strike price.
A put option is out of the money if the
underlying stock price is higher than the strike price.
For example if a stock falls to $50 and your
strike price on a put option is $55, then you can buy the stock for
$50 and sell it for $55. Provided your purchased each put option for
less than $5 you make a profit.
Stock Insurance - put options can also be
used as an insurance for your stocks. Say for example you bought
some stocks at $10 and they went up to $50 and you were worried they
fall. You can purchase a put option to give you the right to be able
to sell them at $50 anyway, if they did drop.
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