Raging Bull: WHAT IS A PUT OPTION?

Raging Bull: WHAT IS A PUT OPTION?


– My name’s Olivia Marshal, and I’m here to help you understand
what a put option is, and when you might wanna buy one. So, you might wanna consider puts when you’re bearish on a particular stock. Let’s run through an example, and say you’re bearish on Netflix, meaning you’re expecting Netflix
to come down from here. You’d only wanna consider put options if you’re expecting a quick,
sharp drop in the stock. That is where money is made
when you’re buying puts. So, you have some choices to make in terms of what contract to buy. You’re gonna have to
decide on strike price, then expiration date, and you’re gonna have to decide how much you’re willing to pay for this option. The cost of an option’s called premium. It’s set by the market, and it’s always fluctuating based on what the underlying stock is doing. Let’s talk real quickly
about strike prices because they’re very
important to understand. Strike prices are either at the money, in the money, or out of the money. The at the money strike price is the strike that is
the same, or very close to where the current stock is trading. So, if Netflix is trading
at 300 dollars a share, the at the money strike price is 300. Any strike price above
300 is in the money, and any strike price below
300 is out of the money. The further in the
money your strike price, the more expensive that option’s gonna be because the more intrinsic value it has. Intrinsic value is a
very important component in how option are priced. Out of the money options
have no intrinsic value which makes them cheaper, more lucrative, but also much more risky. So, let’s just say you go with a at the money Netflix put option that expires 30 days from today. This is a very typical options contract. Let’s say you end up paying
a premium of five dollars. So, you buy one contract with
the premium of five dollars. It’s gonna cost you a total
of 500 dollars to buy. One thing you need to understand is that when you’re a buyer of options, you are buying a depreciating asset, meaning every day that goes by, the value of your option is decaying. This is called time decay. Time is always working against you. So, let me show you what I mean. If Netflix just stays at 300 dollars all the way until expiration, you would lose your entire investment, even though Netflix didn’t
really go against you. This is why you’re always looking for that explosive move
when you buy options. You need the stock to move in your favor and to do so quickly. Notice, though, what would have happened if Netflix did make this sharp drop down the day after you bought your option. You would have over 50
percent return on your money. Your 500 dollars is now
more like 700 dollars. Puts are a great way to
capitalize on crashing stocks.

2 thoughts on “Raging Bull: WHAT IS A PUT OPTION?

  1. Why am I the only one soaking up this knowledge on this page? I believe people are caught up into all of the drama of this current political climate going in America! Their in a political choke hold here in America. The only part of the economic spectrum they care about is job's, job security, and wage's; and I'm on here trying to break the poor man's mentality, and change my financial outlook, and future. That's my political agenda, increasing financial knowledge, and becoming financially independent, and totally avoid the political choke hold on this nation. I refuse to be a zombie nation robot. lol, great video post! Keep them coming… lol😁

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