How do Stock Options Work in a Falling Market?

Stock Options allow us to make money in the stock market, whether it's going up or going down. When Options Trading in a falling market, Put Options offer the trader excellent profit potential.

A Put Option is a contract that relates to a particular stock or share and owning a PUT OPTION gives you......

The right (but not the obligation) to sell a fixed number of those shares at a fixed price on or before a fixed date.

You would buy Put Options if you had a Bearish view on a particular stock because they give you the right to sell shares.

Strike price or the fixed, pre-determined price at which you can sell the shares if you wish to do so. This price cannot be changed throughout the life of the option.

Expiry The date at which the option contract expires. This is a fixed date and cannot be changed throughout the life of the option. After this date the option contract is worthless.

Exercise A term used when referring to the process of fulfilling the option contract and buying the shares. This can be done any time up to and including the expiry date.

Premium This is the amount you pay for the option contract. Each stock has set strike prices for trading and the amount you pay for each is dependant on where the strike price is in relation to the current share price.

In the U.S a single option contract relates to 100 shares and on the Australian Stock Market one contract relates to 1,000 shares.

Stock Options give you control over shares at a fraction of what it would cost to buy the actual stock.

Let's say XYZ stock is currently trading at $ 15.00. To buy these shares would cost you $ 15.00 each whereas $ 1.50 might buy you an XYZ Put Option that would give you control over XYZ stock.

Put Options can be used many ways...

When investing in shares for the long term it would be nice to know we wouldn't lose money if we were to experience a stock market crash wouldn't it?

Well with Put Options we can do just that!

By purchasing a Put Option with a strike price near what you paid for your shares, you have peace of mind knowing that you can sell those shares at any time before expiry at that price and not suffer a loss.

This is called hedging and is an excellent way to protect your investments, and no different to insuring your house or car.

The most common use of Put Options is to trade them for profit in a falling market. This strategy involves buying a Put to sell at a profit once the share price has dropped (before expiry).

This is called Short Term Trading and is a powerful way to generate an income from shares that are falling. How many people can say they made huge profits in a stock market crash?