Watch our video on how to buy put options contracts.
How to Buy Put Options
- Here's how to buy put options:
- Choose your broker.
- Fund your account.
- Choose expiration date.
- Pick strike price.
- Look for high open interest.
- Look for volume = liquidity.
- Have entry and exit place.
- Place your order.
- Take profits, and limit risk.
Do you know how to buy put options? Basic calls and puts make up the most simple options strategies as well as the advanced ones. As a result, it's important to learn about how to buy put options.
Trading options are a great way to make money in any market. Yes, even sideways markets can be profitable with options. Hence their popularity among those who trade (or want to learn how to trade)
If you're going to understand how to buy put options, you need to know what options are. Let's start at the beginning. An options contract gives you the right but not the obligation to buy (call) or sell (put) a stock at a certain price within a certain time.
1. One Contract
One contract controls 100 shares. As a result, trading options is often less expensive than trading shares; especially the higher priced stocks like $AMZN and $GOOGL.
For example, Let's say you wanted to short a stock called $CRON that's trading at $20 a share. Buying 100 shares means you'd be spending $2,000. If you wanted to trade the option on that instead, it'd be cheaper. You still get to partake in the bullish momentum of the stock, earning you some profits as the stock moves up.
Let's say the put options contract for that stock has an expiration date of September 2019 and was $1. You'd only be putting up $100 in capital to control 100 shares. See the price difference? This might be more your style versus putting up the 2 grand capital to short the stock.
Options trading is an excellent way to grow a small account without having to resort to penny stock trading. While there's nothing wrong with penny stocks, that sector is risky and largely manipulated. Most people will look at penny stocks, then check out options.
Making sense? Moving on, trading services like the Bullish Bears love to trade options. We like to do so in a less risky manor using technical analysis and other formulas to trade. Options may have the reputation of being risky. However, learning how to properly trade them helps mitigate the risk. Hence the need to know how to buy put options properly.
2. What Are Put Options?
Put options take the bearish bias of a trade. Hence the need to know how to buy put options. It's a great alternative to shorting. Shorting is extremely risky and the risk is unlimited. At least with options you can only lose what you invest into the options trade. With shorting its uncapped risk.
Many times, finding trading companies with good short selling ability can seem difficult. Therefore, put options are attractive to traders who want to make money when the market is moving down. AKA bearish markets.
The simplest way to understanding how to buy put options is to understand their goal. In short, buying put options is very similar to short selling. Both are bearish strategies that make traders money.
If you understand shorting, chances are you'll have a good grasp on how to buy put options or the reasoning behind the strategy (check out our how to learn options page).
In other words, puts are what you'd trade using to make money when you find bearish patterns on charts. When you see the proper setup, you make your trade. Set your entry, profit target and stop loss in advance. Always have a plan ahead of time!
For example, if you saw a head and shoulders pattern on Facebook's chart, (any time frame) you'd buy a put option. You want to profit on the move down. When the stock begins to move lower - preferably on high selling volume and a bearish candlestick (like an engulfing bearish or evening star).
You can take advantage of the move south by knowing how to buy put options. Ahead of doing anything, make sure you're comfortable trading options. It's not for the faint of heart and its not a get rich quick scheme.
3. Do You Like Your Options Broker?
You need to get your stock training on and learn how to buy put options. As you do that, make sure you're completely comfortable with your broker. Options have more way moving parts than stock trading does. Specifically the options Greeks. Don't worry we have a whole options course to help you get there.
If you're going to know how to buy put options, you want your trading company to be one you're happy with. A broker is where every aspect of stock market trading occurs. Sometimes you can negotiate your commissions. Brokers usually want to keep your business, so haggle with them if you're an active trader.
Also, you want to make sure you're comfortable reading their options chain. That's the bread and butter of options trading for knowing how to buy put options. The options chain shows you all of the various strikes, dates and volume for the options available for that company. Following unusual volume for a options strike can sometimes be handy along with proper technical analysis.
Knowing all this, make sure you know how to customize your options chain to show what you're looking for; whether its' the Greeks, volume, open interest or all of the above.
Again, you need to practice in a simulated account first. Something we at the Bullish Bears highly recommend for newbie traders.
How Do You Make Money Buying Put Options?
- How do you make money buying put options? Simple. Puts are a directional based trading strategy. They are used when you believe the price of the stock is going down. Your options contract will increase in value the more that the price of the underlying stock falls.
1. Practice: How to Buy Put Options
Have you ever heard the saying "practice makes perfect"? While there's nothing in trading that's going to help you become the perfect trader, practice helps a lot.
We recommend placing hundreds of practice trades before using real money. That may sound excessive, especially to new traders. You're probably thinking that we're being over protective. However, it goes a long way in helping you learn the mechanics of options trading.
You learn the ins and outs of options. They have more going on than stocks. As a result, profit and loss is affected. If you jump right in without learning or practicing how to buy put options, you could blow up your account.
That's not something anyone wants. Hence why practice is key. We love the ThinkorSwim simulated account. They have a great customizable options chain and an easy to use platform.
2. Do You Know How to Buy Put Options?
Since there are moving parts in options trading, it's important to know when the right time to buy a put is. You want the stock to move down in price.
As a result, you're going to be on the lookout for bearish patterns. If you don't know how to buy put options you could miss out on the move.
Candlesticks, patterns along with support and resistance go a long way in helping you place a successful trade. Remember there's no magic formula to give you a 100% success rate.
However, the tools are there for you to have the best information going into a trade. Make sure you know how to spot bearish candlesticks and patterns. Take our candlesticks patterns course to learn more about them.
3. Trade With Risk Management
Knowing how to buy put options is one thing. Trading them using risk management is another. Since you have the potential to lose the entire trade if it backfires, you have to have a max loss.
You may have a max loss in mind and that's great. Sticking to it can be another thing altogether. We've all been in the position of wanting to hold a losing trade in hopes of recovering.
However, options aren't stocks. They're wasting assets. As a result, you need to cut your losses quickly. Risk management is key to protecting yourself; especially with real money.
The Bottom Line
Knowing how to buy put options allows you to profit when the market or a stock is heading down. It's a skill that keeps you from sitting on the sidelines in a bear market; especially if you're broker doesn't have shares to short. Check out our stock alerts for access to our private twitter!