Investing in Options – Risk of the Put Option

Previously,

Now you see the money-making benefit of buying a Put Option. 

Are there any risks?  What could go wrong?

Stating my beliefs up front, I do not believe in dwelling on the negative.  I am very much in favor of having positive thoughts and words.  Having stated that, one must acknowledge risk and be aware of how to manage it.  So – are there risks to buying a put option?  Absolutely.

What could go wrong?

Using the previous blog’s scenario:

Remember that you are wagering that ABC stock value will go down. You bought an option for $300 (100 shares at $3 per share) at a strike price of $40 per share.

However, instead of the stock going down, it is stagnant until two days before you have to exercise the contract.  During the final two days of the contract, the stock rebounds slightly and goes up to $41 per share.  You are not happy, but you now have to purchase the ABC stock for $41 per share while owning the stock at $40 per share.

Valuation

$40 – $41 = -$1 per share

100 x -$1 = -$100.00

Less Purchase

-$3 per share

100 x -$3 = -$300.00

You Lost

-$4 per share

100 x -$4 = -$400.00

Stock Gain

$41 – $39 = $2 per share

100 x $2 = $200.00

So – you lost $400 on this investment while the stock value went up $200 – this would have been your gain if you would have just purchased the stock outright.

If you asked yourself, “Why do I have to buy an option contract for a set price of $3 per share?” the answer is:  there are cheap options.  That will be the next blog post.

Gary

About Gary

I am retired, but not tired. I still want to be valuable to others. I know that others are valuable to me. After looking back on six decades, I have asked myself this question: “What do I believe?” My mind filled up. My heart started beating faster. My spirit soared. I post blogs to share what my mind is working on, what my heart believes would help others and, what my spirit is communicating to me. What do I believe, you ask? Decisions dictate your path In love, not hate In tolerance, not prejudice In health, not sickness In wealth, not poverty In kindness, rudeness In happiness, not sadness In encouragement, not discouragement In faith, not doubt In courage, not fear I have been and will be challenged in each one of these beliefs, but the biggest belief is to stay positive and not turn negative. This belief helps me maintain all of the others.

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