What is Buying Put Options? ✅ Explanation for Beginners

[00:02] about buying puts: the theory, practical examples, charts, market times when it's in our interest, everything. What is a put option purchase contract ? Let's start with a technical phrase and I'll translate it in 4 seconds. When you buy

[00:19] a put option you obtain the right, but not the obligation, to sell the underlying asset at a specific strike price before the expiration date, protecting you against possible depreciation of the asset. We

[00:34] translated it, right? When we buy a put option, we are acquiring the right to sell a package of 100 shares at a certain price and a certain date. To acquire this right, we must pay a premium. If you think about it

[00:48] , buying a put is the opposite of selling a put. The same as before. Okay, let's move on to a practical example to see how simple it is, and again we'll use the Ford company. And we, for whatever reason, believe it will

[01:03] fall, so in this scenario we again have several options. If we own those shares, we can sell them and wait for the price to drop before buying them back. For example, we can also sell the shares and

[01:18] we can also sell the shares and also buy some other shares because we want to, for example, collect the dividend and buy some other shares.

[01:38] anything like that, which is how you'll understand it better. We bought an output and understand it better. We bought an output and set our selling price at $10. For this, as I mentioned, we will have to pay a premium, in this case of

[01:52] $40. If the price stays the same or goes up, we will simply lose our $40, but in return we have protected ourselves against that possible drop; but

[02:04] if the price goes down, we will be making a profit. Let's take an extreme example so that the calculations are clear. This example assumes the stock price drops to 5, and we 've secured the ability to sell it at 10 through the contract and the

[02:21] premium we paid. This way, we would buy 100 This way, we would buy 100 shares at $5, totaling $500, and sell them at $10 thanks to the put option purchase, totaling $1,000.

[02:38] Therefore, our profit after deducting the premium would be $460. And as with the purchase of Col, the most we can lose is $40. If

[02:50] we have 100 shares, but for whatever reason we don't want to sell them, it will be exactly the same, but in this case we will end up facing some losses. We'll use the same example. We have 100

[03:05] shares of Ford at 1059, which would be a total of $0.59. And as I mentioned, we don't want to sell them. It's okay, we'll just leave them there quietly. We are receiving the dividend because this

[03:20] company does distribute dividends, and at the same time we are buying puts. Let's go to the same extreme case where the stock drops to $5. The value of our shares, the ones we have n't sold, has dropped from $0.59 to

[03:37] which of course would represent a loss of $559. But as we have already seen, by buying puts we will receive an income of 460,

[03:53] so the real losses will actually be about $100 instead of the $559 we would have lost if we had simply left the shares and not bought the put. And we have

[04:07] bought the put. And we have obtained this protection solely and obtained this protection solely and exclusively by paying a $40 premium. And if you read the markets like an expert, obviously, what would be the best

[04:20] situation? Basically, we know the price is going to drop because we would sell price is going to drop because we would sell all our shares at 59. Then, since we know the price is going to drop, we would buy the put option and get those

[04:34] profits of $460. And when the price drops to the minimum, in this case $5, we use the 9 plus the 460 and it will give us enough to buy

[04:46] plus the 460 and it will give us enough to buy about 300 shares. If you combine this with what I explain in the lip video, it's going to be incredible, because you'll see that you'll be able to earn up to three times more

[05:01] using long-term cabbage purchases than simply buying and holding. But as I said, this is not so easy to happen, it is simply an extreme example so that you understand it perfectly. Even so, as you've

[05:15] seen and I think is quite clear, using the help options in any situation is a big advantage over traditional investing. Let's look at the pros and cons of buying puts. You already know that

[05:31] you can watch a completely free course on YouTube, but if you like it and want to learn much more, becoming an expert in financial options, I recommend you check out the advanced course where you will learn

[05:43] much more and you won't have to go to the community of smart investors. The first advantage is that we can profit from a bear market. If you were one of those who just bought and waited for it to go up, well, if the

[05:58] market is bearish, there's no way to make a profit. But now that you know what buying puts is, you'll be able to make a profit even if the whole market is in the red. The second advantage is that we can protect

[06:13] our shares. If you don't want to sell your shares for whatever reason , whether it's because you want to collect dividends or you do n't want to declare them and therefore don't want to sell them, buying puts can protect you. We will be

[06:29] incurring a loss because the stock price is falling, but at the same time, thanks to the purchase of puts, we will be making money. And that's basically what protecting yourself is. The money I lose on one side with the money I

[06:46] gain on the other side leaves me with the same protection. And another advantage is that, unlike trading, you know from the beginning the maximum amount of money you can lose. No matter what the market does, even if the stock goes to

[07:02] infinity, the most you'll lose is the premium you paid. And honestly, the only downside is also related to the premium, because we have to pay a premium. Obviously, we can't have all the

[07:17] benefits if we don't pay something in return. Let's look at the current market conditions or which stocks we're interested in buying puts for. And I think the market timings are pretty clear, right? Basically, in bear markets, neither bulls nor

[07:34] neutrals are of interest to us. To make it much clearer and help you learn something new, I'm going to show it to you now with a different type of graph. And for this section I'm going to use the website called Option Strat. It's free and you can

[07:48] use it to start playing with different stocks, strikes and expiration dates to see the premiums you can get. And to change the example, let's use, for example, Tesla with a current price of

[08:02] $221. We added our put purchase, which as you know we can play with the dates. In this case, I'm going to set it for December 20th, and we can also play with the strike price, but in this case, I'm going to

[08:17] set it at $220. In other words, I am reserving the right to sell my shares at $220 until December 20, even if the price goes to zero. Let's look at the three possible results. If the price goes up,

[08:33] even if it goes to infinity, our only loss will be the premium we paid. If the price drops a little, but remains above $2, which is our break-even point, we will lose money, but less and less each time. And if the price goes down,

[08:51] and the more the price goes down, as you can see, the more money we make. All this with the hope that the price will drop significantly, and when we believe it can't stop anymore, we close our contracts, earn that money, and

[09:08] use it to buy shares to take advantage of the rise. Or instead of buying shares, we can also buy calls, as I explained in this video, and earn three times more than we would by simply buying and

[09:23] waiting. If you want to see the entire free course, you can click here. And if you want to become an expert, click here and check out the click here and check out the advanced course.