What are options?
Options are derivative contracts that provide its owners the right to buy or sell securities at a predetermined price (i.e. the strike price) within a certain time period. This time period comes with a specific expiration rate. The investor pays for the option or the right to make the transaction, though they have no obligation to do so within the given period of time.
What is a put option?
The investor has purchased the right to or the option to sell through a contract in a put option. He or she purchases the right to sell your stock at the strike price anytime until the expiration day at a specified price. Put options are traded on various underlying assets, such as stocks, currencies, bonds, commodities, futures, and indexes.
What determines the option pricing?
The value of the underlying asset, implied volatility, dividends, strike price, time period and interest rate determine the option pricing. Generally, the put options increase in value when the underlying asset falls in price, as the volatility increases, and as interest rates decline. The converse happens when they lose value.
What are the benefits of investing in a put option?
Traders get more leverage using the put options than purchasing assets. The investor is provided the flexibility to speculate and hedge risks. Some structured solutions, given by the put option, allows the investor to not just hedge against adverse market conditions but also to reverse positions to profit. The investor has an opportunity to trade options in different modes i.e. either between private parties over-the-counter (OTC) transactions, or they may be traded in live, orderly markets in the form of standardized contracts.
What are the disadvantages of investing in a put option?
It comes with a risk of a very competitive market and sophisticated investors. It requires the hand of specialists due to its complicated workings. The inability to understand associated risks will result in substantial losses to the investor.
