by Chris Rowe 08/19/08
Although a put option contract gives you the right to sell your stock at a designated price, most put buyers don't actually use their contracts to sell that stock. Rather, they typically sell the put option contract to someone else without any stock transaction ever taking place.
This is similar to the way a futures contract is traded. For example; a futures contract represents someone's intent to buy sugar. If the price of sugar goes up, the investor would most likely sell the futures contract at a profit, rather than using it to buy a truckload of sugar and then tying to sell it to the local grocery store.
Most people will tell you that trading options is a very risky strategy. Well, that all depends.
You can put all of your money into a single biotech stock that's about to announce whether or not its only major drug will receive FDA approval. You could also own all of that stock on margin, which adds to your risk exposure.
But just as there are more-conservative ways of investing in stock, there are ways to approach buying puts in a more-conservative fashion as well. It all depends on the strategy you use, and I will show you how to cut your risk when playing the options market with puts.
Read on for Rule No. 1 ...
