Buying Options Vs. Selling Options – Which Is Better?

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In finance, a put or put option is a stock market device which gives the owner of a put the right, but not the obligation, to sell an asset the underlyingat a specified price the strikeby a predetermined date the expiry or maturity to a given party the seller of the put.

The purchase of a put option is interpreted sell options a sell options sentiment about the future value of the underlying. Put options are most commonly used in the stock market to protect against the decline of the price of a stock below a specified price. In this way the buyer sell options the put will receive at least the strike price specified, even if the asset is currently worthless. If the strike is Kand at time t the value of the underlying is S tthen in an American option the buyer can exercise the put for a payout of K-S t any time until the option's maturity time T.

The put yields a positive return only if the security price falls below the strike when the option is exercised. Sell options European option can only be exercised at time T rather than any time until Tand a Bermudan option can be exercised only on specific dates listed in the terms of the contract.

If the option is not exercised by maturity, sell options expires worthless. The buyer will not exercise the option at an allowable date if the price of the underlying is greater than K. The most obvious use of a put is as a type of insurance. In the protective put strategy, the investor buys enough puts to cover his holdings of the underlying so that if a drastic sell options movement of the underlying's price occurs, he has the sell options to sell the holdings at the strike price.

Another use is for speculation: Puts may also be combined with other derivatives as part of more complex investment strategies, and in particular, may be useful for hedging.

By put-call paritya European put can be replaced by buying the appropriate call option and selling an appropriate forward contract. The terms for exercising the option's right to sell it differ depending on option style.

A European put option allows the holder to exercise the put option for a short period of time right before expiration, while an American put option allows sell options at any time before expiration. The put buyer either believes that the underlying asset's price will fall by the exercise date or hopes to protect a long position in it.

The advantage of buying a put over short selling the asset sell options that the option owner's risk of loss is limited to the premium paid for sell options, whereas the asset short seller's risk of loss is unlimited its price can rise greatly, in fact, in theory it can rise infinitely, and such a rise is the short seller's loss. The put writer believes that the underlying security's price will rise, not fall. The writer sells sell options put to collect the premium.

The sell options writer's total potential loss is sell options to the put's strike price less the spot and premium already received.

Puts can be used also to limit the writer's portfolio risk and sell options be part of an option spread. That is, the buyer wants sell options value of the put option to increase by a decline in the price of the underlying asset below the strike price.

The writer seller of a put is long on the underlying asset and short on the put option sell options. That is, the seller wants the option to become worthless by an increase in the price of the underlying asset above the strike price.

Generally, a put option that is purchased is referred to as a long put and a put option that is sold is referred to as a short put. Sell options naked putalso called an uncovered putis a put option whose writer the seller does not have a position in the sell options stock or other instrument.

This strategy is best used by investors who want to accumulate a position in the underlying stock, but only if the price is low enough.

If the buyer fails to exercise the options, then the writer keeps the option premium as a "gift" for playing the game. If the underlying stock's market price is below the option's sell options price when expiration arrives, the option owner buyer can exercise the put option, forcing the writer to buy the underlying stock at the strike price.

That allows the exerciser buyer to profit from the difference between sell options stock's market price and the option's strike price. But if the stock's market price is above the option's strike price sell options the end of expiration day, the option expires worthless, and the owner's loss is limited to the premium fee paid for it the writer's profit.

The seller's sell options loss on a naked put can be substantial. If the stock falls all the way to zero bankruptcyhis loss is equal to the strike price at which he must buy the stock to cover the sell options minus the premium received. The potential upside is the premium received when sell options the option: During the option's lifetime, if the stock moves lower, the option's premium may sell options depending on how far the stock falls and how much time passes.

If it does, it becomes more costly to close the position repurchase the put, sold earlierresulting in a loss. If the stock price completely collapses before the put position is closed, the put writer potentially can face catastrophic loss.

In order to protect the put buyer from default, the put writer is required to post margin. The put buyer does not need sell options post margin sell options the buyer would not exercise the option if it had a negative payoff. A buyer thinks the price of a stock will decrease. He pays a premium which he will sell options get back, unless it is sold before it expires.

The buyer has the right to sell the stock at the strike price. The writer receives a premium from the buyer. If sell options buyer exercises his sell options, the writer will buy the stock at the strike sell options.

If the buyer does not exercise his option, the writer's profit is the premium. Sell options put option is said to have intrinsic sell options when the sell options instrument has a spot price Sell options below the option's strike price K. Upon exercise, a put option is valued at K-S if it is " in-the-money ", otherwise its value is zero.

Prior to exercise, an option has time sell options apart from its intrinsic value. The following factors reduce the time value of a put option: Option pricing is a sell options problem of financial mathematics.

Trading options involves a constant monitoring of the option value, which is affected by changes in the base asset price, volatility and time decay. Moreover, the dependence of the put option value to those factors is not linear — which makes the analysis even more complex.

The graphs clearly shows the non-linear dependence of the option value to the base asset price. From Wikipedia, the free encyclopedia.

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There are many topics that you should try to understand fully before you actually get started with options trading. For example, you should certainly understand how options contracts work and the different types of options contracts that you can buy or sell. Once you have a decent knowledge of those topics it makes it much easier to understand the different orders used to buy and sell options. There is quite a range of different options order that options traders can use and this in itself is a fairly complicated subject.

However, providing you can understand the four main types of options orders, of which the sell to close order is one, then you are in a position to start trading options. The sell to close order is one of the two most simple and commonly used options orders along with the buy to open order.

Basically the buy to open order is used to enter a position by buying options contracts, and the sell to close order is used to exit that position by selling those options contracts. The other two main options are essentially a reversal of that process; the sell to open order is used to enter a position by short selling options contracts and that position can be closed by using the buy to close order. You do need to understand the distinction between these four types of options order, but in practice using the sell to close order is actually a relatively straightforward process.

In very simple terms, there are two ways to make money in options trading: In practice, most options traders tend not to exercise their options and instead try to make their returns through the buying and selling of options contracts. There are a number of different options trading strategies that can be used, but the most basic strategy is to simply make a profit by buying options contract and then selling them when they go up in value. When you buy stocks you are relying on them going up in value in order to make a profit by selling them; you can also receive dividends on stocks to make a profit.

One of the big advantages of options trading is that you can also buy options contracts that make you money when the relevant stock goes down in value. This is because there are two main types of options contracts that you can buy, call options and put options. Call options increase in value when the price of the underlying stock goes up, whereas put options increase in value when the price of the underlying stock goes down. Of course, the underlying security in options contracts can also be other financial instruments other than stock.

As mentioned above, it's possible to make money through buying options contracts and then exercising your option under the right circumstances. However, it really is somewhat easier to buy options contracts and simply sell them if they go up in valuenwhich is where the sell to close order is used.

If you own call options on a particular stock, then you have the right to purchase that stock at an agreed strike price. If the current trading price of that stock is higher than the strike price in your options contracts, then you can exercise your option to buy that stock at the strike price and then sell the stock immediately for a profit.

However, assuming you bought the options contracts before the price of the stock went above the strike price, you could simply place a sell to close order to sell those options contracts and make a similar profit without having to worry about actually buying and selling the stock.

Owning put options gives you the right to sell the relevant underlying security at an agreed fixed price. So, if the underlying security was trading at a price lower than the strike price then you could buy the underlying security and the sell it at the strike price to make a profit.

Again, though, it would be simpler to just place a sell to close order to close your position by selling those options contracts and making your profit that way. This is how most options traders will generally realize any profits they have made. So in summary, it's clear to see that the concept of the sell to close order really is quite simple. It's basically the order used to sell options contracts that you already own.

When you use the sell to close order, you are closing your positions and relinquishing any rights that the options contracts gave you to buy or sell the underlying security.

You can use the sell to close order to realize any profits you have made through options contracts you own going up in value. You can also use the sell to close order to dispose of any options contracts you own that are falling in value, and cut your losses before their price drops any further.

To place a sell to close order you will need to use an options broker. An options broker will execute your order for you by selling your options contracts on the market at the going rate. There are different types of options brokers, including full service brokers that can offer you professional advice or discount brokers that simply carry out your orders and generally charge lower fees.

Using online options brokers is generally regarded as the cheapest and simplest way to trade options. Information On Sell To Close Orders There are many topics that you should try to understand fully before you actually get started with options trading. Section Contents Quick Links. Using Sell To Close Orders In very simple terms, there are two ways to make money in options trading: How to Place Sell to Close Orders To place a sell to close order you will need to use an options broker.

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