Put Options

Put options are stock options that give its holder the right, but not the obligation, to sell the underlying stock at a fixed price by a fixed expiration date.

Put options enable you to sell the underlying stock at a price fixed right now, no matter how low it falls in the future. However, put options are rarely used as a tool to sell stock. Rather, investors use them as a way to capture value as an underlying stock drops. Put options enable investors to profit from a downturn in stocks without going into margin or shorting anything. Shorting stocks exposes the investor to unlimited upside risk whereas buying put options incurs nothing more than the price paid for the put options.

How do put options work?
Put options are financial contracts between a buyer and a seller. The seller or "writer" of put options is giving the buyer of those put options the right to sell to him stocks at a price fixed and agreed upon in the put options contract.

The buyer or "holder" of these put options can now hold on to them, hoping that the stocks will drop in price over time, before the put options contract expires. If the stock does drop, he can then either sell the put options on to another buyer at a higher price or buy the stocks at the prevailing market price and then exercise the right vested in the put options to sell the stock to the seller at the higher agreed price, thus turning a profit.

Put Options: Sellers
Clearly, the seller or "writer" of put options is expecting the value of the stocks to stay flat, so that he will make a profit without having to really buy the stocks from the holder of the put options.

Put Options: Buyers
The buyer of those put options is clearly expecting those same stocks to go down and is willing to pay a small price to speculate on that bet. This expectation is also captured in the popular investor sentiment indicator known as put call ratio. Put call ratio is the ratio of the amount of put options traded versus call options traded. The trading volume ratio between put options to call options on the open market is a widely used investor sentiment indicator known as the put call ratio. For example, a high volume of puts compared to calls indicates a bearish sentiment in the market.

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