Put Option - Buying A put

What is Put Option...

The buyer of a put option has the right to sell 100 shares of stock at the strike price and exercise the option before the contract expire.

The seller/writer of a put option has the obligation to buy 100 shares of stock at the strike price if the option is being exercised.

Trade...

On 24 May 2012, Hewlett-Packard Company (NYSE:HPQ) traded at $21.00, you believe the stock price will fall,  you consider buying a put instead of shorting the stock to give you more leverage.  So you enter into a put contract with strike price $20.00 at price $1.50 per share expires in June. Paying $150 to own a put contract, you're " long one LOW June 23 Put".

What is your maximum LOSS...

Your maximum loss on this trade is $150.00.

Long Put

Stock price fluctuates from time to time, what will happen to your options...

In-the-money: If stock price fall to $16.00, by exercising the options you will gain $200.00 [20-16-1.5=2.5]. Your total return is 166.66% [250/150]

Break-even: If stock price is $18.50, by exercising the option you gain $1.50,  break-even after deducting the option costs [20.00-18.50-1.50=0]

At-the-money &  Out-of-the-money : If stock price goes higher than strike price $20.00 or equal, you're not going to exercise the option, you loss $150.00, the premium paid. Your loss is capped.

Most options trader will sell the option instead of exercising it. (Why Not Exercising the Option)