Finding Profits With Put OptionsThe one thing that everyone who is commodity investing has in common is the fact that they all want to make money. While the goal is the same, there are a number of different methods for making the plan happen. For a number of successful traders, put options represent an excellent way to make profits while actually limiting exposure.
There are two different types of options contracts: call options and put options. Each is an investment strategy that reflects a vastly different approach. A call option gives its purchaser the right, but not the obligation, to buy a specific futures contract at a predetermined price within a limited period of time. A put option gives its purchaser the right, but not the obligation, to sell a specific asset in a commodity trade, at a predetermined price and within a limited period of time.
Options are very different from futures trading; futures contracts require the buy or seller to complete the transaction outlined in the futures contract according to the parameters of the agreement. Options contracts merely provide their buyers with the right to buy or sell a commodity according to the agreement made. Another feature of options is that the purchaser of a call or put option cannot lose more money than the premium that he or she initially invested and is not susceptible to margin calls because call and put options are not purchased on margin.
Both call options and put options are considered wasting assets, or are said to have “time decay.” This means that because they are contractual agreements, they only have a limited lifespan. Whether it is weeks, months or years, there is an expiration date and the contract is over by that date. Time decay can affect the premium, the cost of purchasing a contract, because the closer to the expiration date a contract is written, the less likely it is that you will meet your conditions. In options trading as with anything else, time is money.
Another contract condition that is consistent for both call and put options is the parties involved. By its nature, an options contract will always have both a buyer and a seller. Additionally a buyer of a call or put option does not need to post a margin because the most he or she can lose is the price of the premium. The seller of an option, on the other hand, will generally be required to post one based on the contract’s option value.
Reasons For Put Options
One of the most conservative options trading strategies is to help protect assets against adverse price fluctuations. If you are concerned that market trends are moving against your investments, you can use put options as a kind of hedge fund to safely minimize your losses. If your commodities trading starts going against you and prices decline, your put options will increase in value, helping to offset other losses. If you holdings rise instead of falling, you will only lose your premium on the puts, since you can allow them to expire without moving on them.
Trading put options can be a very strong part of a successful trading plan. Because a good trading plan will include means for protecting your wealth as well as increasing it, buying puts can become part of a valuable defensive investing strategy. Put options are a great way to safely increase your wealth and offset any losses you might incur due to the fact that they are increasing while your original investments are decreasing.