Continue reading...One creative way in which put options can be used is to buy a desired stock at a discounted price.
This strategy works best when a stock has recently had a sharp drop, to a point that you believe is a bargain price. It will allow you to buy the stock at a discount from the current market, if the stock behaves as you expect. And if the stock suddenly soars, you may make a tidy profit even though you missed buying the stock. Here’s how it works.
When stocks drop sharply, some of the people who hold them buy put options as protection. From their point of view, they are buying a guaranteed stop-loss. This increased demand for puts drives up their price.
A savvy investor can then sell put options on the stock in such a way that the only possible outcomes are
Purchase of the stock at a significant discount to the present market price or
A high return on the cash that is committed to the potential stock purchase.
Example Put Option Trade
*Example only, not a trade...
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