Profiting from Derivative Put Options

Investing in put options can be an easy way to make a profit, all while managing risk. The risk is minimized because you are not actually buying shares, but instead, selling the rights to shares at a specific price. In order to make money, you must first understand how they work, engage a broker, and begin with smaller investments. These investment rights cost much less than actual shares.

Whether or not to use a broker is one of the first questions asked. Since the Internet has grown, many investment brokers and firms have websites that allow you to setup an account and manage your own transactions. The problem with this is not having advice available from a professional. It's recommended that you get some much needed guidance, prior to going at it alone. Once you get some experience under your belt, you will then have the confidence and experience to trade on your own.

Understanding stock shares versus options is critical to playing the stock option derivative market. The difference is that buying shares costs the full price as listed in the market. In order to buy the stock option rights to sell (put), you are not buying the shares. The seller holds onto the shares, but gives you the rights to sell them at the set price. Both parties are at risk. However, since you do not have to invest the full amount of the share price you are at less risk.

Put options allow you to set a price to sell the shares if they go down. The idea is to place a hold on the price. If the price drops, you can sell the hold, or rights, to the higher price. Another investor can then sell the shares at that higher price. This all happens within a certain time period. And just like call options, out options have expiration dates. This is the inherent risk with both put and call option investing, as if your option contracts expire out of the money all of your investment is lost.

The risk that is involved is often less than actually buying shares. Since the rights to sell the shares are only a fraction of the actual market price, you are not on the hook for the entire amount. With this transaction, you are only buying the rights to sell, not the actual shares.

The expiration date is part of the transaction. The fee paid for the rights is often dependent on the actual length the rights can be exercised. The hope is for a price drop prior to the rights expiring. If the time period is long, there is more chance the price will drop. The person selling the rights is betting this will not happen prior to the date the rights expire. Their risk is in the length of time.

This transaction is often considered safer than buying stock. With the higher cost of buying shares, if the price drops, you are on the hook for the loss. In other words, if you buy high and sell low, you lose money. If you purchase the rights to sell high, instead of purchasing the actual shares, your investment is much less. If the purchased rights expire, you only lose the fee for the rights.

Using put options to make money through the market is a great way to temper the risk involved. Using this transaction, you are hoping the price of a particular stock will go down. You are given the rights to sell the shares at the higher price that was agreed upon in the transaction.