When Is The Best Time To Exercise A Put Option?

A put option is a contract that allows the holder to sell a stock at a set price at or before a set period of time. The holder of the option has the right but not obligation. In other words, they can choose not to exercise the option with no penalties. When you buy a put option, you pay a premium to a ‘writer’ who keeps it regardless of what happens in the underlying stock.

How You Profit From Put Options

Put options offer something unique in the world of stock trading. You actually profit from downturns rather than the rising value of a stock. You should buy put options for stocks that you expect to decrease in value. The time to exercise a put option is when the value of the underlying asset drops well below the strike price (the price at which it can be exercised) by the expiration date.

Why Stocks Fall

Knowing when to exercise your put option requires you to understand what’s happening in the stock market. Stocks fall when people want out. In a situation where there’s more supply than demand, investors begin selling off the stock as quickly as possible. You should exercise your put option when this happens as soon as you can.

What Can You Do With A Put Option?

There are several different things you can do with a put option when you exercise it. Most commonly, traders exercise the put, which then means you take on a short position in the underlying stock. If the stock continues its’ downward trajectory, you continue to profit by having already sold the stock short at a higher price. To secure the profit on the short stock, you simply “buy back” the stock by entering a “buy to cover” order via your broker.

One of the advantages of put options is that there’s very little risk. The absolute worst that could happen is that you might lose the initial premium you paid for it. There are also ways to hedge against this loss if you’re an experienced trader.

Profiting By Selling Put Options

Another way to profit is by selling put options. Selling is also known as ‘writing,’ and when you sell a put option you become a ‘put writer.’ The goal here is to sell options you think are worthless in the hope that they expire without being exercised. You then profit from the premiums. If done right, this can be highly profitable, but it also carries risks. You may end up having to buy the stock shares if they exercise the option.

If you want to make money as a writer, your best bet is to offer options to traders who have a bullish outlook. These traders believe that the price of the underlying value is going to go up. When it doesn’t rise, they’ll let it expire without exercising it and you’ll never have to process it.

Buying put options is a great way to make money in a market that’s down. If you know how to use them, you can make great profits either as a holder or a writer.