The price at which you have the right to sell the stock.
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)
Strike Price minus Premium (In this example: $93). buy to open put example
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.
If you hold until expiration, the option expires worthless, and you lose your $200 premium. 3. The "Wrong" Call (Stock Rises) The stock rallies to $110 . The price at which you have the right to sell the stock
You wouldn't exercise your right to sell at $95 if you can sell on the open market for $110.
Two weeks later, Company XYZ misses earnings and the stock price plunges to . Action: Buy to Open (BTO) Asset: 1 Put
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.