Investing in Options – Risk of the Put Option « Health Now, Wealth Forever

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By Gary, on November 10th, 2012

Are there any risks?  What could go wrong?

Stating my beliefs up front, I do not believe in dwelling on the negative.  I am very much in favor of having positive thoughts and words.  Having stated that, one must acknowledge risk and be aware of how to manage it.  So – are there risks to buying a put option?  Absolutely.

What could go wrong?

Using the previous blog’s scenario:

Remember that you are wagering that ABC stock value will go down. You bought an option for $300 (100 shares at $3 per share) at a strike price of $40 per share.

However, instead of the stock going down, it is stagnant until two days before you have to exercise the contract.  During the final two days of the contract, the stock rebounds slightly and goes up to $41 per share.  You are not happy, but you now have to purchase the ABC stock for $41 per share while owning the stock at $40 per share.


$40 – $41 = -$1 per share

100 x -$1 = -$100.00

Less Purchase

-$3 per share

100 x -$3 = -$300.00

You Lost

-$4 per share

100 x -$4 = -$400.00

Stock Gain

$41 – $39 = $2 per share

100 x $2 = $200.00

So – you lost $400 on this investment while the stock value went up $200 – this would have been your gain if you would have just purchased the stock outright.

If you asked yourself, “Why do I have to buy an option contract for a set price of $3 per share?” the answer is:  there are cheap options.  That will be the next blog post.