How Much Do Puts Cost in the Stock Market?

Puts, like other options and stocks, rise or fall in price every business day.

A put is a contract that allows you to sell something at a fixed price. If you own a put on a stock, the put carries both a strike price--the price at which you may sell the stock--and an expiration date. The price of the put varies with several different factors. Remember, if you wish to invest in puts and other options, do plenty of research on these volatile investments and don't use money that you can't afford to lose.

Intrinsic Value

With puts and other stock options, the first price factor to consider is intrinsic value. A put contract allows you to sell the underlying stock at a fixed price. Thus, a put with a strike price of $90, on a stock quoted at $80, has an intrinsic value of $10. The options market offers a range of put options, which either have intrinsic value ("in the money") or no intrinsic value ("out of the money"). Of course, options with intrinsic value are worth more than options without intrinsic value.

Time Value

Puts carry expiration dates. Expiration takes place on the third Friday of the contract month. Thus, your December 90 put will expire on the third Friday of December. If the underlying stock is quoted at 85 on that day, you will receive $5 per option contract, in cash. If the stock has reached $95, your option has no value and will expire worthless. The longer out the expiration date, the more time value the put has. Time value gradually decays. Puts at the same price but with different expiration dates will be priced lower for the closer expiration dates.

Volatility

A third factor in option pricing is volatility. Options on a stock that moves through a larger price range will be worth more than options on stocks that don't move at all. That is because a faster-moving stock price has a greater chance of rewarding the option holder with a profit. Options on volatile stocks sell at a premium to their intrinsic and time values. They also change in price according to basic supply-and-demand: the greater the public interest in the stock (and demand for the option), the higher the option price, all else being equal.

Pricing Methods

Option contracts on stocks actually represent 100-option lots. Thus, if you buy an option contract that is priced $1.00, you are actually buying 100 options, and will pay $100, in addition to commissions. You may also sell the option, in which case you would be paid $100 in cash (less commission). Of course, if the stock falls in value, you ultimately will lose on the investment, as you will have to buy back the option at expiration, when it will be worth more.

Selling Puts

The strategy of selling a put option can help you hedge stock investments. If you own 100 shares of a stock, you may sell an option on those shares. If the stock falls, you buy the shares at the strike price; instead of losing on the stock you've hedged the investment with the income from selling the put option. If the stock rises above the strike price, you don't have to buy at all. The option expires worthless, and you keep the put-selling income.

Trading Puts

Puts and calls (options to buy) can also be traded on their own. The price of options fluctuates with the price of the underlying stock, but at a much greater rate of change, meaning the chances for profit and risks of loss are greater. A fast-moving stock can cause option prices to change several hundred percent or more in a few days or hours. The basic fact to remember is that as a stock falls in price, a put increases in value. This value fluctuates more rapidly as the expiration date draws near, and most rapidly around the option's strike price.

References

• Swing-Trading-Options.com: Selling Naked Puts
• TheStreet.com: Naked Puts Are a Dangerous Game
• OptionTradingPedia.com: Stock Options