WHAT ARE
PUT OPTIONS?

Different options can help you build out your portfolio in different ways.

eToro has both bullish options and bearish options.

This one’s for the pessimists – the bears.

So, what are put options? 

They’re contracts that give the owner the right to sell 100 shares of a stock or ETF at a certain price called the strike price.

Put options only let their owner do that for some time – they have an expiration date.

So, why would you buy a put option?

One speculative strategy would be to buy because you expect the stock to go down before the option expires.

Maybe everyone else thinks that their exciting new product is going to change the world, but you can tell it’s actually awful and trash, so you buy a put option.

Well, how would that play out?

Understanding how options prices change is complicated, but we wanted to give you a simple blueprint for how they work.

Good news: there’s generally only four possible outcomes at the expiration of the option and understanding these will simplify how put options work.

So let’s get into it.

Situation 1: Profit

You win – to profit, the stock price needs to move below the strike price of your option at expiration.

And not just below; below by even more than the cost of the option.

If you bought an options contract for one dollar with a strike price of ten dollars, you will be in profit if the stock reaches a price below nine dollars before the options expiration situation..

Situation 2: Break Even

If the stock price exactly matches the strike price minus the premium you paid you would break even.

Because eToro options will attempt to sell your options at 3:30 PM EST on their expiration date, if you held an option until then you would, in most cases, get back the premium you paid and this transaction would net you a whopping zero dollars and zero cents.

Situation 3: Partial Loss

What if at expiration the price of the stock you bought was at nine dollars and fifty cents? 

Well, to break even you needed the stock price to hit nine dollars because that’s the strike price of ten dollars minus the premium of one dollar, right?

In this case, your option has some value.

It’s still a contract that lets someone sell 100 shares of a stock for ten dollars that on the market only can be sold for nine dollars and fifty cents.

Hence, if you held your option to its expiration date you would likely get back half of the premium paid.

Situation 4: Total Loss

Let’s say the stock price simply stays at ten dollars or, even worse, goes up higher.

Either way, at your option’s expiration date, the right to sell 100 shares of a stock for ten dollars when it’s already trading at ten dollars is worthless – everyone can already do that.

And the right to sell it for ten dollars when it’s trading at eleven dollars at your option#s expiration date – that is very worthless.

We hope this simplified blueprint gives you a better idea of how options work.

Trading options isn’t right for everyone, but they do offer investors new and exciting ways to engage with the market.

Explore eToro options today.