Unlike shorting a stock, your maximum loss is strictly limited to the premium paid. Key Terms to Remember Premium: The "entry fee" you pay to the seller.
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
Two weeks later, Company XYZ misses earnings and the stock price plunges to . Unlike shorting a stock, your maximum loss is
Strike Price minus Premium (In this example: $93). Two weeks later, Company XYZ misses earnings and
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)
To profit from a downward move without actually shorting the stock (which carries infinite risk).