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Option traders use Put option contracts to benefit in a fall of the underlying share price. Options trade at adiscounted price to the share. Therefore, instead of Short Selling the full value of the shares, you can benefit ina fall in price using less exposure of capital.Stock investors also use Put option contracts as a means to Protect their stock positions. This is because the Putoption gives the buyer (taker) the right to sell their shares at the strike price.Example:
QQQQ QQQQ Dec 51.00 Puts
Price $51.07 $1.75 Number 100 shares 1 contract
Total Value $5,107.00 $175.00
To purchase 1 QQQQ Dec 51.00 put, we would spend $175.00 (not including brokerage). The equivalent valueof shares is $5,107, giving us “leverage” over a fall in the share price.
Profit from a fall in the underlying (market/stock)
Purchasing long-term options requires a smaller investment to hold value of the same underlying stock position. Example; $10,000 of stock might be approximately $1,000 of option value. Gives you leverageexposure over the stock.
Risking smaller amount of investment capital to gain a larger percentage of profit.
Can buy an option that benefits from the markets falling.
Can also adopt defensive strategies if the markets change conditions.
Allows stock investors to sell their shares at a fixed price, no matter how much the stock may havefallen
Lack of understanding can cause investors to pay too high a price for options or to purchase wrongoptions to suit expected goals.
Education and practice are required to gain a thorough understanding of options. This takes time and patience.
100% of position could be lost if position is not managed correctly
Different strategies could be adopted depending on the investors outlook for the stock and time-framefor investment