I’m studying for my series 7 and these puts are confusing to me. I just don’t understand it, can someone explain it in plain english? thank you so much.
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Ok, say that you and I make a deal. You buy a put option from me, that is, I agree to buy (say) 1 shares of ABC stock from you for $10 a share. But you can choose whether to to sell it or not. And you pay me a fee for that right. That’s a put.
So after you buy the put, you pray that the stock tanks, so that you can get it cheaply. If you buy it for $8 a share, you can force me to buy it for $10 later because of the deal. Meanwhile, I hope that the stock goes up, because if it goes over $10, then you won’t exercise your right, but at least you already paid me that fee, which I keep.
If I have no shares of ABC at present, then I have sold you an uncovered, or naked, put. Why would I do this? Because maybe the stock is presently at $15. I was thinking of buying the stock, anyway, if it dropped to $10. I could have told my broker to go buy it if it ever got down to $10 (limit order), but this way, I still buy the stock at $10 if it goes down, and if it doesn’t, hey, I still get to keep the fee.
I’m being inexact with my English, but there’s a more formal explanation below.
Source(s): http://en.wikipedia.org/wiki/Put_option
A put option is the right to sell but not an obligation to sell the underlying security. When you buy a put you are betting the stock price will go down. Selling puts is a bullish stance and when you sell any type of option you receive premium. uncovered just means you dont own the stock.