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!

2/ First off, make sure you are familiar with the basics. Check out my first thread below to get a quick primer (or refresher!) on the topic. https://twitter.com/SahilBloom/status/1283080850641317889

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:
- No Earthquake = Fine
- 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...