Understanding and Trading Put Options

Copyright 2006 Billy Williams

Put options are a misunderstood investment tool but once understood by an individual investor it can be a very versatile investment tool. Put options can be used to protect your portfolio, and they can help you pick up huge profits by controlling the stock of a company during a price decline and profiting from the decline. Plus, put options offer strictly limited risk. If an option trade goes the wrong way, you won't lose more than your initial investment plus commissions.

So what are put options? Put options are a type of investment that gives you the right to buy an underlying security at a higher price for a specified amount of time and if that security falls lower you can purchase the shares at that price and then sell it to the issuer of that put option at a higher price and keep the difference as your profit.

In other words, put options give you the right to bet on the price decline of a stock, but you are limited to that bet for a certain period