There are many different strategies used in the stock market to protect your hard earned money. One of the easiest to use is the put option.
A put is an option contract that gives the holder the right to sell the underlying stock at a specified price (strike price) for a certain fixed period of time.
For example: If you owned 100 shares of XYZ stock at $45.00 per share and also purchased a PUT option at a strike price of $42.50, you would have the right to sell your stock (before the option expiration date) for $42.50 no matter how low the market price went.
So, if today XYZ stock plunged to $10.00 dollars per share, you could exercise your PUT option and sell your 100 shares of stock for $42.50 per share.
A PUT option is a good way to protect yourself, especially in such a volatile market.
There are other ways to MAKE money with a Put option. It is possible to sell a put. If you are in a stock that you feel is bullish, (or that is going to go up in value) then you can sell a put. If you guessed correctly, and the stock goes up, you keep the premium as profit. The problem with this is that if you guess wrong, and the stock moves against you, you are obligated to buy the stock at the strike price.
For example: You sell 1 put contract (100 shares of stock) at a strike price of $42.50. If the stock price stays above this amount, (for the contracted period) you keep the premium as a profit. However, if the stock price drops to $10.00 per share, you are still responsible to buy the stock at $42.50. Ouch! This is why selling a put is only recommended to the very experienced options investor.
Paul Zuckerman
pnpinvestors@sbcglobal.net
http://www.geocities.com/paul.zuckerman@sbcglobal.net
Source: www.articlesbase.com