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Answer:
Dear
Saul,
You're
right in that put options are sometimes called "portfolio
insurance."
Options
in general
Owning
an option gives you the right to buy or sell a specific
investment at a set price and within a predetermined
time frame. There's no obligation to exercise the
option or to buy or sell before the option expires.
The
particular item related to the option -- a stock,
an index, a Treasury or a currency or futures contract
-- is called the underlying investment.
Put
options defined
A
put option gives the buyer the right (but not the
obligation) to sell an underlying asset at a given
price. You asked about stocks. In most cases, puts
have 100 shares of stock as their underlying asset.
And one typically buys put options on stocks that
you believe will go down in price.
For
example, you might purchase a put option on XYZ Corporation's
common stock that gives you the right to sell the
100 shares at $70 per share until say, September 30th.
The price (in this example, $70) is called the strike
price and the date (December 1st) is the expiration
date.
Options
come in various strike prices, depending on the current
market of the underlying asset. They also come with
a variety of expiration dates. These dates can range
from one month out to more than a year (LEAPS options).
Your
potential loss is limited to the cost of the premium
-- that is the dollar amount you pay to buy the option.
Or,
you might buy put options on a stock index as a way
to hedge your stock portfolio against sharp drops
in the market. In other words, you would sell your
options at a profit if the market declines. The money
you receive on the sale will ideally cover the losses
in your portfolio due to the declining market.
Finding
Puts
You'll
find option tables in the newspaper. The tables list
the name of the stock, the strike price, the expiration
date, the volume (number of trades from the previous
day) and the last or closing price for the option
on the previous day.
Note:
If you wish to buy options, you can do so through
Freedom Investments. Click
HERE for details.
For
Further Information
I
suggest that you take a course in options before jumping
in. Check with your local Y or any schools that have
continuing education classes. If you cannot find a
course, create your own and trade on paper until you
become comfortable and successful. Then go for the
real thing.
The
Chicago Board Options Exchange has helpful,
easy-to-understand information for beginners. Go to:
www.cboe.com
and click on "Strategies."
Good
luck!
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