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Buy a Put: What Does It Mean? | SterlingTerrell.net

Buy a Put: What Does It Mean?

  Buying Put Option, Payoff Chart

What does it mean to "Buy a Put" on a commodity, stock, or index?

This simply refers to: The buying of a put option.

A "put" option is the right to "sell."

(Whereas, a "call" option is the right to "buy.")

The most common example of options is in real-estate.

One can buy the right, but not the obligation, to purchase a property at a set price within the next so many days.

It is the same for an option on a stock or commodity.

Buying one put option on cotton at 70.00 cents/lb. gives one the right to sell 100 bales of cotton (or one futures contract on cotton) for 70.00 cents/lb. anytime between now and the option's expiration date.

If 2.00 cents/lb. is paid for buying a put option, and the price of cotton goes down by 10.00 cents/lb, the profit for buying the put option is 8.00 cents/lb.

Buying a put option limits the potential loss to the premium paid for the option - while the potential gain is limited as prices hit zero.