What is a Put Option? - Stock Options for Beginners
A put option pays out when the stock price falls below the strike price at expiration.
• Payout: The option pays the difference between the strike price and the stock price, minus the premium paid (which is the cost of the option when you buy it).
Example:
• Strike Price = $100
• Stock Price at Expiration = $80
• Payout = ($100 - $80) - Premium Paid
• Payout when stock price is lower than the strike price: If the stock price is above the strike price, the put option expires worthless.
• The premium (the cost of the option when you buy it) is the maximum loss.
• Implied volatility (explained in the Option Q&A) is crucial in options pricing.
Higher volatility increases premiums, making options more expensive.
• Volatility vs. Stock Movement: If the stock price goes up but volatility drops, the value of a call option might decrease. This is because lower volatility limits the potential for larger price moves, reducing the upside.
• Tip: Sometimes it’s better to wait a few hours after market open when volatility is lower, as this can lead to cheaper premiums and more potential upside for calls.
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