A put gives the holder the option (not the obligation) to sell a security before the expiration date at a predetermined price. The holder of the option is called the buyer, while the seller of the option is called the “writer.” The main risks faced by options traders vary between being a “holder” and a “writer.” Let’s understand the extent of the risk they face:
When a buyer or holder purchases a “put,” they are buying the right to sell a stock to the seller at a specific price. The risk they are taking is the premium they are paying to buy the put. The return potential, on the other hand, is the difference between the stock price at the time of sale and the strike price. Puts are generally purchased when research suggests the stock price will fall in the near future. So when someone buys a put, they are expecting the price to fall – and in doing so, they are taking the immediate risk of paying a premium.
When you sell a put option, you are selling the “right to sell” to someone else. The profit potential for a seller or vendor is the premium paid by the buyer for the option. The risk, on the other hand, is the strike price at which the put option holder will sell the stock. To avoid the risk, the put option seller wants the market price to remain above the strike price. In such a case, the put option holder would rather sell the security in the market rather than exercise the option and sell cheaper.
While there is no denying that options trading is risky, if you do your research properly, it is only as risky as a single stock. In fact, it can be more lucrative than the individual stocks – if done correctly.
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