Put option: how to use them

Using a put option always works well when the market is choppy and volatile. In order to take advantage of any volatility that might occur, you can use a put option or a call option to increase your earnings from the investments you have made and you can also decrease your investment losses. The person that owns the right to use a put option has the right to sell stocks once a certain price is hit, while those that would sell a put option must buy at a certain, pre-determined price. If you own a call option, you can buy at a certain price while if you sell call options you must sell once a certain price is hit.

Commonly, a put option is used for the owner of a stock as a failsafe mechanism. It allows him to build some insurance in place if the stock price were to plummet. Think of it as a safety net. Let’s illustrate this point with an example. Let’s take a fictional company called DynaCorp dealing in renewable energy solutions. Now let’s assume I own a 100 shares of DynaCorp. If those shares closed today at $25 a share, I can buy a put option for a strike price of $21 for $0.60. This means that for $0.60 per share of DynaCorp, I have the right to sell the stock for $21 anytime before a set date in the future. Of course, I won’t cash it in unless DynaCorp’s shares drops below $21. That’s the only scenario in which it would make sense to sell it.

Personally, I prefer to sell a put option as opposed to buying. Let’s continue with that example. Let’s say I want to buy a 100 shares of DynaCorp. But I will pay no more than $21 for it even though it closed at $25 yesterday. So if the price of DynaCorp shares falls to $21, I will buy it. But if it’s even $21.50 is the price, the status quo will remain and I will not own DynaCorp shares. Hopefully, this illustrates to you how to use a call an put option to exploit and benefit from market volatility.