Put option is almost the same thing as Call option; the only difference is that here, we predict that the price movement of an asset will decrease whereas in case with Call option- the price should increase.
Let’s look at a Put option more precisely and accurately and try to find its main distinctions.
Put – is a right to sell a basic asset at a strike price. And here arises a question: in order to have a right to sell a basic asset, a trader should somehow have it, doesn’t he? – it is an absolute truth and therefore let’s move further and see how we can do it.
When the Put Option Should be Bought?
Put option should be bought when you predict that the price development of the basic asset will go down. For example, let’s imagine such a situation: you have bought a Put option, which gives you an opportunity and right to sell one hundred shares of a basic asset at a strike price of $100 for each share with an expiration of one month ($10.000). In a month, the cost of a basic asset becomes $80. You go to the market/ stock exchange and buy a basic asset at the price of $8000 and exercise the right to sell this basic asset at the price of $100 for one share which means that you will get additional $20 from every share. Considering that you are an owner of one hundred shares, your profit will make $2000. The only money that should be subtracted from this $2000 is the premium you have paid for the option.
Buy Low and Sell High
NOTE*** In the majority of cases, you would not even have a need to buy a basic asset. You can simply sell the option itself on the market. The main idea and principle here is to receive a profit as a result of purchasing or selling options, and not shares. This will make the process and your life way easier. Option has its own market price and therefore all you need to do is just to buy options at their lowest prices and sell them at their highest prices as any other financial instrument.
If this part of this short guide is clear, then let’s move further and find out what happens if the price movement of the basic asset is against your predictions.
If the price development of the basic asset is against your prediction, the maximum you can lose in this trade – is the premium which is paid for an option.
Whereas in case if the price of the basic asset moves in a suitable for you direction (the one you have predicted) then ATTENTION – the main difference between Call and Put is that the profit is limited. Because the price of a basic asset cannot be negative. Yet when buying a Call option and the conditions are favorable, there are absolutely no limits.