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Understanding how Put Options work and your choices in various scenarios relating to the fluctuation of the related stock prices are the fundamentals of Options Trading. This article gives an overview of Put Options and how you can make money through purchasing and selling Put Options.

A Put Option gives its buyer (holder) the right to sell 100 shares of the underlying security at a fixed price per share, at any time between the purchase of the call and the stipulated date when the option expires. The buyer has a choice and is not obligated to exercise the option. The seller (writer) of the Put Option has granted this right conferred to the buyer of the option.

A buyer of a Put Option takes the position that the stock value will depreciate (fall in value) within the effective date of the option, because that will result in a corresponding increase in value for that put. This means that there will be a higher market value in the put, which can be sold and closed at a profit. This is because a Put Option works in the complete opposite way from a Call Option. It is also true that an appreciation in the stock value would result in a decrease in the value of the Put Option.

For a better understanding, let’s further go on to illustrate various scenarios relating to the price of the underlying stock and take a look at the choices for action within each. Remember that this is in relation to Put Options.

Scenario 1 – The Market Value of the Underlying Stock Appreciates

In such a scenario, the value for the related Put Option will depreciate. The buyer of such an option will have three choices. He can either choose to sell the Put Option at the current price below his purchase price and suffer a loss, hold on to the Put Option in the hope that the stock value falls and the Put Option appreciates or simply let his option expire if his option is already nearing its expiration date.

Scenario 2 - The Market Value of the Underlying Stock Remains Stagnant

In such a scenario, the price of the underlying stock has not seen a change, or the change is too insignificant to create an opportunity for profit. The option buyer has two choices. The first choice he can make is to sell the Put Option before its expiration date. As the price of an option is determined by the remaining time before its expiration, the option buyer will most certainly see a loss if he sells his option without the underlying stock price seeing an depreciation. The magnitude of the loss will depend on how much time is remaining in the option before expiration. The second choice he can make is to hold on to the Put Option in the hope that the stock’s market value will depreciate before expiration and his Put Option would appreciate.

Scenario 3 - The Market Value of the Underlying Stock Depreciates

In such a scenario, the value for the related Put Option will appreciate. The buyer of such an option will have three choices. He can sell off his option at the current price which is above his purchase price and make a profit, sit it out and hope for the underlying stock to depreciate some more, or exercise his option and purchase the underlying stock he is entitled to.