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Trying to understand put options (with an example)

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  • Apr 7th, 2020 9:57 am
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[OP]
Jr. Member
Dec 13, 2015
166 posts
75 upvotes
Red Deer, AB

Trying to understand put options (with an example)

Trying to understand how all the terminology applies as well, so I've posted a screenshot of a practice put option.
So for example, SPY today at end of day was 266.55. If I were to buy a SPY Apr 09 260 put, as per the screenshot below, I just wanna see if I'm standing this all correctly.
- The strike price is 260
- The price of this particular PUT itself is 3.06
- I can sell this put at any point before end of market day on April 9th
- If I were to sell the put option when market price for example is $262, my profit would be 266.55 (price at time of put option purchase) -262 (current price) - 3.06 (price of each individual put option), multipled by the number of puts I bought?
- I can sell at any point (ie when SPY is 262, if it goes to 260 (strike price), if it even goes to 255, as long as I manually sell before expiry of contract? As Long as I do it before the expiry of the put, which is the end of market day on the 9th in this example?
- If I don't manually sell or close the position, if at the expiry of the put, the price is "out of the money" aka above $260, then the puts I purchases are worth zero? but if the price is below $260 or "in the money", then that results in a trade of the underlying stock if the option is exercised? (this part I'm confused with)

If someone could tell me whether all this is correct, or where I'm entirely wrong here, it would be much appreciated!
Images
  • Screen Shot 2020-04-06 at 7.05.32 PM.png
  • Screen Shot 2020-04-06 at 7.05.15 PM.png
1 reply
Member
May 18, 2017
439 posts
222 upvotes
Toronto, Ontario
- The strike price is 260
YEs that is correct

- The price of this particular PUT itself is 3.06
The price the put option last traded hands was 3.06, between the bid and ask

- I can sell this put at any point before end of market day on April 9th
Yes. Anytime before the End of day on April 9th. SPY,QQQ,SPX options actually trade to 4:15pm

- If I were to sell the put option when market price for example is $262, my profit would be 266.55 (price at time of put option purchase) -262 (current price) - 3.06 (price of each individual put option), multipled by the number of puts I bought?
Not really, the price is mainly determined by the greeks. Understanding the greeks and how they affect the price is the most important. Google the 5 greeks of options pricing

- I can sell at any point (ie when SPY is 262, if it goes to 260 (strike price), if it even goes to 255, as long as I manually sell before expiry of contract? As Long as I do it before the expiry of the put, which is the end of market day on the 9th in this example?
Yes, SPY can be at any price and you can sell it. Value will decrease if spy goes up though

- If I don't manually sell or close the position, if at the expiry of the put, the price is "out of the money" aka above $260, then the puts I purchases are worth zero? but if the price is below $260 or "in the money", then that results in a trade of the underlying stock if the option is exercised? (this part I'm confused with)

Yes if you're puts are not in the money by expiry they will expire worthless. If your put goes ITM, you dont need to exercise, just sell it before 4:15pm before expiry date. Careful though, your broker might auto liquidate options that are expiring within an hour or two. EX if SPY is 255 at the time of expiry, your put option will be worth $500 since the strike is 260, netting you at ~$200 profit

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