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Glossary of Terms and Strategies for Options Trading
Complete Options Glossary: Strategies, Terms, Greeks, and Option Selling Techniques. Clear, concise, and suitable for both beginners and advanced traders. Learn to trade options effectively.
Basic concepts
Beginner
Put option
An option giving the right to sell the underlying asset at the strike price by the expiration date. The buyer of the put protects against a decline, the seller (writer) has the obligation to buy the shares if the option is exercised.
Detail
A put option is a contract that gives the buyer the right (but not the obligation) to sell an underlying asset (e.g. 100 shares) at a pre-agreed price (strike price) by a certain date (expiration). The buyer of a put option pays a premium and receives protection against a decline (hedging) or the opportunity to speculate on a decline. The writer (seller) of a put option has an obligation to buy the shares at the strike price if the buyer of the option “forces” him (assignment). Put options are used for hedging (e.g. portfolio protection), to profit from a decline (buying a put) or to generate income (writing a put = receiving a premium with the risk of buying the shares).
A Put Option allows the holder to sell shares at the strike price if the share price falls below this value. The buyer of a put expects the share price to fall, or is protecting himself against losses (e.g. hedging a long position). The writer (seller) of a put option bets that the share price will not fall below the strike price and the option expires worthless — for which he receives a premium. Put options therefore function as an insurance against a decline, but also as a tool for generating income from selling options.
Optimal conditions
Put buyer: expects a decline in the stock price, or wants to protect against losses on a stock he owns. Put writer: willing to buy the stock at the strike price (e.g. as part of a Cash Secured Put strategy) if the stock price falls below the strike. Also used when the stock is expected to be stable or grow to generate income (put writing).
Max profit
Put buyer: expects a decline in the stock price, or wants to protect against losses on a stock they own. Put writer: willing to buy the stock at the strike price (e.g. as part of a Cash Secured Put strategy) if the stock price falls below the strike. Also used when the stock is expected to be stable or grow to generate income (put writing).
Max loss
Buyer: maximum loss is the premium paid (if the stock stays above the strike). Writer (seller): maximum loss is (strike x 100 - premium) if the stock falls to zero and must buy it at the strike.
Risks
Buyer: loss of premium paid if stock does not fall below strike. Writer: high loss if stock falls sharply below strike (must buy stock at higher price than market price). Need to hold margin or cash to cover obligation.
Greeks
Delta: for a put option it is negative because the value of the option increases as the stock price falls. Theta: time decay (Theta) works against the buyer (the option loses value over time), beneficial to the writer. Vega: increasing volatility (IV) increases the value of the put option (beneficial to the buyer).
Variations
Long Put (buying a put for speculation or protection), Short Put (writing a put for income or entry into a stock), Cash Secured Put (secured put). Protective Put (protecting long stocks). Put Spreads (Bear Put Spread, Bull Put Spread).
Usage example
Put buyer: Expects AAPL to fall from $150 to $130. Buys a put with a strike of $140, expiration in 30 days, premium of $2. If AAPL falls to $130, he gets the right to sell for $140, making $10 per share (minus the premium). Put seller (writer): Wants to buy AAPL cheaper, writes a put with a strike of $140, premium of $2 (=$200), if AAPL falls below $140, he buys the shares at that price, but has the premium as a “discount”.
DTE
Buyer: typically 15–90 days (more time for the stock to move). Writer: typically 7–45 days, shorter options lose time value (Theta) faster.
IV (implied volatility)
Higher IV = higher premium (good for listing, expensive for buying). IV tends to be high before earnings and events. IV often drops after events (IV crush).
Premium
Buyer: price paid for the right to sell. Writer: premium received as income for the obligation.
Margin
Buyer: No (pays premium, no margin). Writer: Yes, unless it is a Cash Secured Put, the broker requires margin based on strike and volatility.
Notes
Put options are a basic tool for portfolio protection and for speculation on a decline. A put statement (e.g. Cash Secured Put) is suitable for investors who want to buy shares cheaply. It is necessary to monitor the margin and be prepared to buy shares. Put spreads can limit risk.
Tags
put option, put, put option, short stock, portfolio protection, hedging, put statement, cash secured put, right to sell, assignment, strike, premium
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