One of the best ways to make money with a negative outlook on a stock is the put option.http://www.zacks.com/stock/news/31060/5+Careful+Ways+to+Win+with+Options Buying and selling put options takes advantage of bearish sentiment and downward reality of a stock. This page will describe in steps how to use put options while also explaining put options for investing.

Put options are similar to selling short a stock without having to risk the money involved in a short sale where you must come up with the price of the stock at the short sale. With an option you are limited to the price you paid on the option contract and any brokerage fees.http://www.cboe.com/LearnCenter/Concepts/Basics/equity.aspx<ref>

Although there is short sells available for option trading this page discusses the put options in view of a long position.

There is a need to understand the principles of a put option and psychology behind them. As in most investments you are gaining the contract from someone that believes you are wrong in your belief which way the stock will trade. The research for both a broker to trade with and a company to bet against is important. Then executing the buy and sell, or exercise of the put option become critical to making any profit on your investment.

Understanding a put option is different than most investments and some terms need to be reviewed as they have opposite meanings than a call option. Below is a list of terms that are written looking from the put option perspective.

Put Option Terms"

Put Option: A set right to sell a stock at a certain price before a specified date.

‘’’Contract’’’: an option contract consist of 100 shares of one company that can be traded.

Expiration Date: the date the option has to be exercised or the offer to buy or sell becomes annulled.

'Strike price: the price on the option that is to be paid to exercise them. In the case of put options the sell price.

Market price: the price a stock is traded on a stock market.

Market to Strike ratio: The ratio is the difference between the price on the options and the market value.

Exercise: the action taken to sell the shares by the holder of a put option.

‘’’In the Money’’’: When a strike price is above the market price on a put option. This is where you want to be.

At the Money: When a strike price and the market price are close.

‘’’Underwater’’’: when the strike price is below the market price on a put option. This is not where you want to be.

Once you have an understanding of the terms you can start to look the what and where of your trading.

Like all investment with put options there are some basics searching you need to look into. ‘’’# Find a broker that works for you.’’’ For those that want to online there are several factors to look at including: price, trading tools, access, and reliability. For some the call on the phone broker who does a lot of the work for you works well. Whatever broker you choose you still as it is your money must look into what you want to invest in.

‘’’#Research the stocks and the stock market.’’’ A Put option investment requires not only do you need to have a reason for believing that a stock will drop, but that it will drop before the expiration date. It will also have to drop enough for you to make up your investment cost which include brokerage fees. Some things to keep in mind when buying or holding a put option. ‘’’When is the expiration date?’’’ A put option is like a ticking time bomb that needs to be gotten rid and sold or exploded by exercising the option. ‘’’When are the stock’s earnings coming out?’’’ A stock’s price can expect movement when earnings come out or near if they adjust guidance with a warning. ‘’’What could make the stock move?’’’ Product launches, or even product delays in the case of put options are something to look out for.

Buying and Selling or Exercising ‘’’# Buying the put option:’’’ once you have focused on a stock that you think is ready for devaluation and you are sure enough to part with your cash, then it is time to buy the option. One thing to remember is the difference with the put option and a short sale is that the option limits your loss to what you paid for the options and the brokerage fees incurred in buying the option.

‘’’#Sitting on the Option:’’’ once you bought it you must watch the market and the stock price to see how the option is trading. An option will have value as long as it is close to at the market price the longer there is time before the expiration date.http://www.cboe.com/LearnCenter/Concepts/Beyond/premium.aspx Just keep that date in mind or else the option becomes worthless after that date.

‘’’#Exercising the option:’’’ unless you already own the stock there is little reason to buy the shares to exercise them put option. There will be plenty of owners of the stock that will pay you for that right to sell it at a higher price.

‘’’#Selling the option:’’’ is a simple transaction except when you approach some date like the Triple Witching and the Quadruple Witching which occurs four times a year when there can be quick swings in prices as four types of contracts expire. You must take into account brokerage fees when figuring you have a profit if you are at the money. Hopefully this will be a problem and your option are not underwater.

The content in this page is not a substitute for professional financial advice. Please contact a finance professional before using the information presented here