This app calculates the gain or loss from buying a put stock option. The gain or loss is calculated at expiration.
When purchasing a put option you are buying the right to sell a stock at the strike price to the option writer. This is a bearish trade as you are speculating the underlying stock price will decrease.
If the price of the stock is less than the strike price, the option buyer would use the right to sell the stock to the option writer. The option writer is obligated to purchase the stock. The option owner/buyer would buy the stock at a lower price and sell it to the option writer/seller at the higher strike price. On the other hand, the option buyer could just keep the stock and take a short position on the stock.
If the stock price is greater than the strike price, the buyer would not use the right to sell to the option writer. In this case, the option buyer, it would not be profitable to sell a stock at a lower price than it is worth to the option writer.
Note, this calculator does not take into account the commission paid to the stock broker.
This example will use a gold coin instead of a stock to explain options. Most likely, this will be more easily understood than using stocks. We will use an imaginary option seller named Fred.
- Fred believes the price a gold coin will down slightly or around $50.
- You believe the price a gold coin will decrease significant amount.
- Fred borrows a gold coin from a rich friend and sells it for $1,000. Being a good friend Fred will return a gold coin back to his friend. Therefore, Fred is obligated to purchase a coin.
You and Fred enter a contract which gives you the right to sell Fred a gold coin. Some of the details are as follows:
- If you wish, Fred must purchase the coin you sell him at a price of $900.
- To enter the contract you have to pay Fred $30.
- You can exercise the contract at anytime.
Important note, you are not obligated to sell Fred the gold coin. You have the option or right to sell Fred the gold coin.
The price of the gold coin decrease to $500.
You exercise the contract right to sell a the coin to Fred. You buy a coin for $500 and sell it to Fred for $900. You profit $370 dollars. Remember, you already paid Fred $30 to enter the contract.
On Fred's side, he already sold a coin for $1000 and bought a coin from you for $900. He profits $100 plus the $30 dollars to gave him to enter the contract. Of course, Fred could have made $500 if he never entered the contract.
The price of the gold coin stays at $1,000.
You would not exercise your right to sell Fred the coin at $900. It would not make sense to purchase a coin for $1000 and then sell it for $900. You would lose $30 for paying Fred to enter the contract.
On Fred's side, he would buy a coin on the open market for $1,000 and return it to his friend. However, he profited $30 dollars from entering the contract.
The price of the gold coin goes up to $1,500.
You would not exercise your right to sell Fred the coin at $900. It would not make sense to purchase a coin for $1500 and then sell it for $900. You would lose $30 for paying Fred to enter the contract.
On Fred's side, he would have buy a coin on the open market for $1,500 and return it to his friend. He would lose $470 dollars.
Use this calculator at your own risk. This calculator may or may not be accurate or reliable. By using this calculator you acknowledge any reliance on this calculator shall be at your sole risk. This page is for educational purposes only. It does not provide investment advise.
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