Traders can make the most of their binary options career by learning about the strategies available to them. Knowing how the market works and how you can take advantage of certain trends will help you make sure your trades are in the best position to earn profits.
A put option is one of these strategies. When you do it right, this option has the potential to offer quick, big gains.
But what is a put option and how can you capitalize on it? The article will look into this trading strategy – its fundamentals, potential, and applications.
How Put Options Work
We previously talked about the call option and how you can use it to make money. The put option is similar but with one fundamental difference: the point at which the contract becomes valuable.
Put option contracts give the owner the right (not the obligation) to sell an asset at a predetermined price – also known as the strike price – upon expiration. Buyers of these contracts are essentially making a wager that the price of that asset will dip. They pay a premium to have access to this option. The value of the put option rises as the underlying asset’s price falls.
Call option contracts are the opposite. They become more valuable when the asset price increases. Buyers of these contracts are making a wager that the price of the asset will rise.
The following are the elements that make up a put option:
- Premium – This is the sum paid by the buyer to the owner of the option for the right to purchase the asset.
- Strike Price – This is the agreed upon price for the underlying asset.
- Expiration – This is the time set when the option expires and the trade is settled.
A put option contract represents 100 shares of an asset. These contracts are priced based on the value of a single share. If an asset sells at $2.00 per share, for example, the cost of the contract is $200 or the price of 100 shares.
How Do I Make Money with a Put Option?
For a put option to be in-the-money, the asset price has to be below the strike price upon expiration. At that point, the owner of the contract can exercise the option to sell the asset at the strike price. The owner can also sell the contract at fair market value to a buyer before it expires.
The owner of a put option contract profits when the premium they receive is lower than the difference of the strike price and the asset price at expiration.
If a trader purchases a put option contract with a premium of $5, for example, and the asset price at expiration is $20 less than the strike price, then the trader earns $15. If the asset price is more than the strike price at expiration, the put option contract is rendered worthless.
Traders use put option contracts to profit off of the decline of asset prices. Using only a relatively small upfront investment, the trader will have the opportunity to earn upon the contract’s expiration. As mentioned earlier, the contract buyer generally expects the asset’s value to fall when the contract expires.
The put option can be a profitable contract for traders who expect an asset to decline in value. By anticipating this fall and paying a premium, you can make money when the stock price at expiration dips beyond the agreed upon strike price.
For more information about the put option contract or binary options trading in general, explore the other posts on our website. You may get in touch with our 24/7 live support team through email (Support@TrustedOptions.com) or phone (+1 (888) 901-5028).
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