Buy Put Option
When an investor makes a decision to buy a put option he is actually buying the option sell a particular stock at a specified price but he is not obligated to do so. There is also a time limit involved on when this option can be exercised. For this right an investor pays what is called a premium to the option seller (also called writer).
The opposite of a put option is a call option. This option operates in the same manner as the put option except the investor is buying the right to purchase the stock instead of sell it. The put and call options are a much safer vehicle than the straight-up futures contract which requires a margin purchase of the underlying asset.
With every put or call option there is a seller of that option. Unlike the buyer of the put or call option, the seller of the option collects the premium but also takes on the obligation to buy or sell the asset to which the option is tied. Option sellers are playing the odds that most options are never exercised.
Put and call options have two very important markers that the buyer must take into consideration when purchasing an option. They are the strike price and the expiration date. The expiration date of the option is important because it is the biggest factor in determining how much the premium will be. The longer the time between the option purchase and the expiration date the higher the premium and vice versa.
The strike price of an option is simply the price where the buyer wishes to exercise his option. How close this price is to the actual spot or cash price of the asset is also a determining factor in the premium. As with the expiration date, the closer the strike price is to the cash price of the asset the higher the premium.
Although there is a chance that an investor will lose their premium price when they purchase an option, it is still the safest of most futures trading. Knowing when to buy a put option or call option is usually a learned process that is learned either by paper trading (practicing with a faux account) or by jumping in with both feet and making a trade.