A put (or "put option") is a contract that gives investors the right to sell a specified amount of a specific security at a certain price within a certain time frame. Put options are available for many assets: stocks, indexes, commodities, and currencies.
How can I use puts when I invest in stocks?
- You can use them to hedge against volatility. Put options increase in value as the underlying asset price and interest rates fall, and as volatility of the underlying asset price increases. Thus, when market volatility increases due to events like the recent COVID-19 pandemic, the value of put options increases as well.
- You can buy put options when anticipating that a stock will drop in price. For example, Facebook's stock is trading at $283.29 right now, and you have information that its stock is going to fall, so you purchase a put option. In six months, if the stock price drops to $200, you will exercise the option by selling the stock at $283.29 while immediately buying back the stock at $200 on the market, effectively earning a profit of $83.29 per share. If the price instead rises to $300, you can choose to do nothing – you're not forced to use the option. This is also the reason why people turned to purchase puts during the March 2020 market crash, as it helped to mitigate market risk by setting a fixed strike price to sell a stock in the future.
Debt to Equity Ratio
Used to evaluate a company's financial leverage and is calculated by dividing a company's total liabilities by its shareholder equity.
Profit is the financial benefit realized when revenue from a business is higher than the costs and taxes involved in operating that business.
Alternative investment class composed of funds that invest directly in private companies or that buy public companies and take them private
Time of declining economic activity, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and sales.
A stimulus package is a coordinated effort by the government to increase spending and investment to "stimulate" an economy out of a downturn.
Shorting a stock
Trading strategy that tries to take advantage of the decline in a stock price by borrowing a stock and sell it now while planning to repurchase it later for a lower price.
Market-capitalization-weighted index tracking the performance of the 500 largest U.S. companies