The put gives the holder the option, not the obligation, to sell the security at a predetermined price before the expiration date. The holder of the option is known as the buyer, while the seller of the option is called the ‘writer’. The major risk that options traders face is the volatility between the ‘holder’ and the ‘writer’. Let us understand the amount of risks they face:
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When a buyer or holder buys a ‘put’, they buy the seller the right to sell the stock at a specific price. The risk they face is the premium they will spend on buying the put. On the other hand, earning potential is the difference between the share price and the strike price at the time of sale. Puts are typically bought when research indicates that the stock price will fall in the immediate future. Therefore, when someone buys a put, they expect the price to drop – while incurring an immediate risk of paying a premium.
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When you sell a put, you sell the ‘right to sell’ to someone else. The earning potential for the seller or writer is the premium paid by the buyer for the option. On the other hand, risk is the strike price at which the put holder will sell the stock. The put writer wants to avoid the risk that the market price remains above the strike price. In such a case, the holder of the put option would sell the security in the market instead of exercising the option and selling it cheap.
While the fact cannot be denied that options trading is risky, if you do thorough research, it is only as risky as an individual stock. In fact, it can be more attractive than individual stocks — if done correctly.
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