Say
you have a strong feeling a stock is about to move lower. You should consider
entering a Put trade. A put will give you the right to sell a stock at a
specified price. A
call has a limited term and an expiration date.
Example:
Take Microsoft trading at $26. The 25 Put is trading for
$0.70. For $70 you could buy one MSFT 25 put (100 x .70). Each contract
gives you control over 100 shares, so you now have the right to sell 100 shares
at $25 per share. If the stock stays at or above $25 the most you stand to lose
is the initial investment of $70.
If
the stock were to fall to $21 at expiration your put would be worth $4 ($25 -
$21). So your put contract is worth $400 ($4 x 100 shares). Subtracting the
initial premium you paid you have a profit of $330.
Using ShareCharts
Option Strategies for Long Puts the entire transaction can be seen clearly. Go
to Derivatives < Option Strategies and select Long Calls from the
‘Strategy’ Drop Down Box. Enter in all relevant parameters and click
‘Update’ to view the chart.