The initial premium paid to acquire the put option is also the maximum potential loss on the trade, which will be realized if the stock remains at or above the strike price through expiration. This is one major difference between buying a put and selling a stock short, as unhedged short sellers face theoretically unlimited losses on a move higher by the shares.
Put Option Explained | Online Option Trading Guide
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PUT AND CALL OPTIONS - Carter Newell
Since stock price in theory can reach zero at expiration date, the maximum profit possible when using the long put strategy is only limited to the striking price of the purchased put less the price paid for the option.
The price at which the option can be exercised— in other words, the price at which the stock may be bought or sold—is known as the strike price. And the time at which the option expires is known as the expiration date.
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So if you own stock at a very cheap cost basis and you think a stock price will decline for the short term, but you still want to hold onto it for the long term, then buy a put option!
Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results.. [Read on.]
Suppose it is February 6st, AAPL is at $755, and you know that AAPL earnings are to be released tomorrow. Also suppose you found out from a friend that knows for certain that the sales are down and profits are down. You can buy an AAPL February $695 put option for maybe $7 or $755 per contract (remember each option contract covers 655 shares so when you see the price at $7 that is a per share price and the option contract will cost $755). You would buy the nearest expiration month because that would be the cheapest, and you would buy the nearest strike price under the current market price because that is where you tend to get the greatest percentage return.
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