Understanding Put Options
Options, both puts and calls, are typically written/sold at different strike prices. For example, even though the stock of XYZ is currently trading at $12.50, there could be put options for prices ranging from $0.50 to $30.00, just as an example. There are several factors that go into determining the strike prices at which people are willing to write options. The writer/seller of an option is the person on the other side of the trade that has the opposite opinion of you. If you are interested in purchasing a put on a stock to hedge your downside, that means the writer/seller of the put is betting that you are wrong and that the stock price will rise instead.
What it means is that the stock has already moved down. Options and other derivatives follow the price of the underlying they are not a precursor to what the underlying is going to do. In other words, the price of a derivative is derived from the underlying. "A straddle is an options strategy in which one ""buys"" or ""sells"" options of the same maturity (expiry date) that allow the ""buyer"" or ""seller"" to profit based on how much the price of the underlying security moves, regardless of the direction of price movement. IE: A long straddle would be: You buy a call and a put at the same strike price and the same expiration date. Your profit would be if the underlying asset(the stock) moves far enough down or up(higher then the premiums you paid for the put + call options) (In case, one waits till expiry) Profit = Expiry Level - Strike Price - (Premium Paid for Bought Options) Straddle" "Writing options means ""selling"" options and ""put"" options are contracts to sell a defined security (the underlying), at a specific date (expiration date) and at a specific price (strike price). So, writing put options simply mean selling to others contracts to sell. Your profit is limited to the premium but your loss may be unlimited in a falling market." "If the strike price closest to the underlying has high open interest, the options expiration is a bigger event.   For instance:  stock is at $20 w/ average volume of 100,000 shares per day.    20 strike has 1000 open interest.   In this example the stock will ""most likely"" pin at 20 if we were expiring tomorrow.     As u prob know, long calls at 19.90 close, turn into stock....long puts at 20.10 turn into short stock.   Option pros (high % of volume) dont want to be short or long after expiration.   Long call holders will sell above 20 to hedge, and long put holders will buy below 20.   1000 open interest is equivalent to 100,000 shares.   That's the same amount as the average volume.   Stock can't really move until after expiration.   If I am long 10 $20 calls, and short 1000 shares I am flat going into expiration.....unless the stock gets smoked and now I am synthetically long a put....Short stock + long call= Long Put Then watch out cause it was artificially locked down." I'm normally a fan of trying to put all the relevant info in an answer when possible, but this one's tough to do in one page.    Here's the best way, by far to learn the basics: The OIC (Options Industry Council) has a great, free website to teach investors at all levels about options. You can set up a learning path that will remember which lessons you've done, etc.  And they're really, truly not trying to sell you anything; their purpose is to promote the understanding and use of options. The only problem with writing puts is that you need to buy the futures, and at the moment at least that is what I am trying to avoid (trying to be as frugal with my investing dollars). I will however consider that strategy, since it does make sense. "First, welcome to Money.SE.  The selected page is awful. I don't know the value in listing different expirations at the same strike. Usually, all the strikes are grouped by month, so I'd be looking at Jan '15 across all strikes.  ""In the money"" means the price of a stock is trading above the strike price, if a call, or below it, if a put.  On 10/20 of some year, Intel was trading at $23.34. The January $25 call strike was just $0.70, and April's was $1.82. These were out of the money. The $25 puts were ""in the money"" by $1.66 so you could have paid $1.90 for the Jan $25 put, with $.24 of time premium.  By November, the price rose and the put fell, to $.85, all time premium.  As with stocks, the key thing is to only buy calls of stock that are going to go up. If a stock will fall, buy puts. Curious, what was the class discussion just before the teacher gave you this image?" "There are many reasons. Here are just some possibilities: The stock has a lot of negative sentiment and puts are being ""bid up"". The stock fell at the close and the options reflect that. The puts closed on the offer and the calls closed on the bid. The traders with big positions marked the puts up and the calls down because they are long puts and short calls. There isn't enough volume in the puts or calls to make any determination - what you are seeing is part of the randomness of a moment in time." "Writing a put for a stock means you are selling the right to sell you stock. Simply put (er no pun intended), ""writing put options"" means you are selling somebody else the right (a contract) to sell YOU a specific stock at a specific price before a specific date.  I imagine the word ""write"" to refer to the physical act of creating a contract.   The specific price is called the STRIKE and the specific date is the EXPIRATION.  By ""writing a put"", you are agreeing to purchase the stock at a particular price (the STRIKE price) before the expiration.  You get paid a fee, the ""premium"", for agreeing to purchase the stock at the strike price if asked to.  If the holder of the contract decides to make you buy the stock at the strike price, you have to do it.     If the stock never dips below the strike price, then the holder of the put contract (a contract you wrote), will never exercise their right because they'd lose money.  But if the stock drops to zero, you could potentially lose up to your strike price (times the number of shares at stake), if the holder of the contract decides to exercise.   Therefore, ""writing puts"" is a LONG position, meaning you stand to gain if the stock goes up.  FYI - ""LONG"" refers direction (UP!), not duration." Yes, theoretically you can flip the shares you agreed to buy and make a profit, but you're banking on the market behaving in some very precise and potentially unlikely ways.  In practice it's very tricky for you to successfully navigate paying arbitrarily more for a stock than it's currently listed for, and selling it back again for enough to cover the difference.  Yes, the price could drop to $28, but it could just as easily drop to $27.73 (or further) and now you're hurting, before even taking into account the potentially hefty commissions involved. Another way to think about it is to recognize that an option transaction is a bet; the buyer is betting a small amount of money that a stock will move in the direction they expect, the seller is betting a large amount of money that the same stock will not.  One of you has to lose.  And unless you've some reason to be solidly confident in your predictive powers the loser, long term, is quite likely to be you. Now that said, it is possible (particularly when selling puts) to create win-win scenarios for yourself, where you're betting one direction, but you'd be perfectly happy with the alternative(s).   Here's an example.  Suppose, unrelated to the option chain, you've come to the conclusion that you'd be happy paying $28 for BBY.  It's currently (June 2011) at ~$31, so you can't buy it on the open market for a price you'd be happy with.  But you could sell a $28 put, promising to buy it at that price should someone want to sell it (presumably, because the price is now below $28). Either the put expires worthless and you pocket a few bucks and you're basically no worse off because the stock is still overpriced by your estimates, or the option is executed, and you receive 100 shares of BBY at a price you previously decided you were willing to pay.  Even if the list price is now lower, long term you expect the stock to be worth more than $28.  Conceptually, this makes selling a put very similar to being paid to place a limit order to buy the stock itself. Of course, you could be wrong in your estimate (too low, and you now have a position that might not become profitable; too high, and you never get in and instead just watch the stock gain in value), but that is not unique to options - if you're bad at estimating value (which is not to be confused with predicting price movement) you're doomed just about whatever you do. Also a layman, and I didnt read the article because it did the whole 'screw you for blocking my ads' thing. But judging from the title, I'd guess someone bought a massive amount of call options for VIX, the stock that tracks volatility in the market. Whenever the market crashes or goes through difficult times, the VIX fund prospers. The 'by october' part makes me think it was call options that he purchased: basically he paid a premium for each share (a fraction of the shares cost) for the right to buy that share at today's price, from now until october. So if the share increases in value, for each call option he has, he can buy one share at todays price, and sell it at the price it is that day. Options can catapult your profit into the next dimension but if the share decreases in value or even stays the same price, he loses everything. Vicious redditors, please correct the mistakes ive made here with utmost discrimination "Your scenario depicts 2 ""in the money"" options, not ""at the money"". The former is when the share price is higher than the option strike, the second is when share price is right at strike. I agree this is a highly unlikely scenario, because everyone pricing options knows what everyone else in that stock is doing. Much about an option has everything to do with the remaining time to expiration. Depending on how much more the buyer believes the stock will go up before hitting the expiration date, that could make a big difference in which option they would buy. I agree with the others that if you're seeing this as ""real world"" then there must be something going on behind the scenes that someone else knows and you don't. I would tread with caution in such a situation and do my homework before making any move.   The other big factor that makes your question harder to answer more concisely is that you didn't tell us what the expiration dates on the options are. This makes a difference in how you evaluate them. We could probably be much more helpful to you if you could give us that information." In addition to all these great answers, check out the Wikipedia entry on options. The most important thing to note from their definition is that an option is a derivative (and nothing about any derivative is simple).  Because it is a derivative, increases or decreases in the price of the underlying stock won't automatically result in the same amount of change in the value of the option. An option, by definition, is a guess about the future value of the stock. If you guess too aggressively, you lose the purchase price of the option; if you guess too conservatively, you may not take the option or may not gain as much as you might have. You need to figure out what you expect to happen, and how confident you are about it, against the cost of taking the option -- and be reasonably confident that the change in the stock's value will be at least large enough to cover the cost of buying into the game. Opinion: Unless you're comfortable with expectation values and bell curves around them, it's significantly easier to lose money on options than to profit on them. And I'm not convinced that even statisticians can really do this well. I've always been told that the best use for options is hedging an investment you've already made; treating them as your primary bet is gambling, not investment. Let's say a stock trades at $100 right now, and you can buy a $100 call option. When you buy the call option (and the money you paid is gone), one of two things can happen: The share price goes up, or the share price goes down.  If the share price goes up, you profit. If the share price goes down, you don't lose! Because once the shares are below $100, you don't exercise the call option, and you don't lose any money.  So if you have a share that is rock solid at $100, you don't make money. If you have a share where the company owner took some ridiculous risk, and the shares could go to $200 or the company could go bankrupt, then you have a 50% chance to make $100 and a 50% chance to not lose anything. That's much more preferable.