If you hold until expiration, the option expires worthless, and you lose your $200 premium. 3. The "Wrong" Call (Stock Rises) The stock rallies to $110 .
Imagine is currently trading at $100 per share . You believe the stock is overvalued and will drop soon due to an upcoming earnings report. Action: Buy to Open (BTO) Asset: 1 Put Option contract (represents 100 shares) Strike Price: $95 Expiration: 1 month from now Premium (Cost): $2.00 per share ($200 total) The Outcomes 1. The Bearish Win (Stock Drops)
You wouldn't exercise your right to sell at $95 if you can sell on the open market for $110.
To profit from a downward move without actually shorting the stock (which carries infinite risk).
Since the market price is higher than your $95 strike price, the option is "out of the money." As expiration approaches, the "time value" of the option decays.
Unlike shorting a stock, your maximum loss is strictly limited to the premium paid. Key Terms to Remember Premium: The "entry fee" you pay to the seller.
Your right to sell at $95 is now very valuable. The option is worth at least $15 per share ($95 strike - $80 market price).
Your maximum risk is capped. You simply lose the $200 you paid to open the position. Why Traders "Buy to Open" Puts
If you hold until expiration, the option expires worthless, and you lose your $200 premium. 3. The "Wrong" Call (Stock Rises) The stock rallies to $110 .
Imagine is currently trading at $100 per share . You believe the stock is overvalued and will drop soon due to an upcoming earnings report. Action: Buy to Open (BTO) Asset: 1 Put Option contract (represents 100 shares) Strike Price: $95 Expiration: 1 month from now Premium (Cost): $2.00 per share ($200 total) The Outcomes 1. The Bearish Win (Stock Drops)
You wouldn't exercise your right to sell at $95 if you can sell on the open market for $110.
To profit from a downward move without actually shorting the stock (which carries infinite risk).
Since the market price is higher than your $95 strike price, the option is "out of the money." As expiration approaches, the "time value" of the option decays.
Unlike shorting a stock, your maximum loss is strictly limited to the premium paid. Key Terms to Remember Premium: The "entry fee" you pay to the seller.
Your right to sell at $95 is now very valuable. The option is worth at least $15 per share ($95 strike - $80 market price).
Your maximum risk is capped. You simply lose the $200 you paid to open the position. Why Traders "Buy to Open" Puts
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