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1/ Options 101 - Put Options Yesterday, I posted Part 1 of Options 101, covering call options. I can’t leave my Bears hanging (the market has done enough of that!), so it only feels right that I cover put options next. Here’s Options 101 - Put Options!
3/ The easiest way to think of a put option is that it is an insurance policy. Imagine you own a house that is worth $1M. You live in California, so you worry about earthquakes. You decide to buy an insurance policy. So you call up your rich friend, Paul. You offer him a deal.
4/ You will pay him for an insurance policy on the house with $1M of coverage. You’ll pay $50K for the policy, which will expire in December 2025. Paul accepts. Congratulations, you’ve just purchased a put option! Strike = $1M Expiration = December 2025 Premium = $50K
5/ You’re not as worried about an earthquake now. You’re covered! One of two scenarios now plays out: 1️⃣ - No Earthquake = 🏠 Fine 2️⃣ - Earthquake = 🏠 Damaged
6/ In scenario 1, you don’t “exercise” your option. The house is fine. You’re only out the $50K premium - worth it for the peace of mind! In scenario 2, you exercise your option. The house is damaged. Paul pays you $500K for the damages. You’re happy you bought the insurance.
7/ So to summarize the 101 series... Call Option = Bullish Bet Put Option = Bearish Bet Why buy options? ▪️Speculate on price movements ▪️Hedge long or short exposure More to come on the nuances of options - pricing, selling/writing - in Options 102 and 103! Stay tuned...

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Sahil Bloom

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