If you already own 100 shares of XYZ, buying this put acts as an insurance policy. No matter how low the stock falls, you are guaranteed the ability to sell at $95.
Your right to sell at $95 is now very valuable. The option is worth at least $15 per share ($95 strike - $80 market price).
You wouldn't exercise your right to sell at $95 if you can sell on the open market for $110. buy to open put example
Your maximum risk is capped. You simply lose the $200 you paid to open the position. Why Traders "Buy to Open" Puts
Imagine is currently trading at $100 per share . You believe the stock is overvalued and will drop soon due to an upcoming earnings report. Action: Buy to Open (BTO) Asset: 1 Put Option contract (represents 100 shares) Strike Price: $95 Expiration: 1 month from now Premium (Cost): $2.00 per share ($200 total) The Outcomes 1. The Bearish Win (Stock Drops) If you already own 100 shares of XYZ,
To profit from a downward move without actually shorting the stock (which carries infinite risk).
The contract is now worth $1,500. After subtracting your initial $200 investment, your profit is $1,300 . 2. The Hedge (Stock Stagnates) The stock stays flat at $100 . The option is worth at least $15 per
The price at which you have the right to sell the stock.