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Chapter 6: Buying options: the scenarios > Buying a put option
Buying a put option
Let’s now examine the various scenarios that can arise when you purchase a put option and the alternative courses of action that are available to you under each scenario. These scenarios are essentially the same as when you buy a call option, except that you are looking for a fall in the market value of the underlying stock, not a rise. Let’s begin by referring to example 6.5.
Example 6.5
Assume you believe the market price of ANZ stock will fall by $1.00 in the next month and you want to profit from this decrease in price.
In example 6.5, you have decided to buy five in-the-money put options at $0.80 each. This will cost you $400.00 (five contracts at $0.80 per share multiplied by 100 shares per contract). By purchasing these options, you now have the right to sell 500 shares in ANZ for the exercise price of $21.50. You are able to exercise this right at any time between now and the option expiry at the end of May.