4 ms·

A Put option is the right, but not the obligation, to sell an item K at price X to a counterparty. If you've agreed to sell a thing for $5 that is worth $4, yo

A Put option is the right, but not the obligation, to sell an item K at price X to a counterparty. If you've agreed to sell a thing for $5 that is worth $4, you're a dollar in the green. As market prices drop your profit increases

devchix 7y ago
Who is the counterparty to these trades? When the market sentiment is negative, the number of these counterparties are narrow and dwindling, surely it's not that easy to find people who will buy a thing for $5? Maybe they would buy at $4.25 or even less?
- songzme 7y ago
  Good job asking from the other perspective. Here it is (over simplified to state a point, you would need to do more research). Let's say Tesla stocks are at 700. If someone offered 2k in addition to the opportunity to buy tesla at $620 / share, I'm sure many people will be lined up to buy it. Not only do you get $2000 immediately in the bank, you also get to buy tesla stock at a 10% discount. Not a bad deal.
  - Insanity 7y ago
    Thank you and parent posters, this makes it clear to me!
- justsid 7y ago
  The counter party is set when you sell the put contract. When you set up a put contract, your broker will find a counter party (or none at all). To incetivice the counter party you pay them a premium, which they get to keep no matter what happens. Once you have the contract, it’s locked in and you have the party. That’s why you set up puts _before_ the general sentiment is that the market will go down.
  - bawana 7y ago
    I don’t mean to be dense but I am still missing something. I appreciate the fact that the counter party is locked in when you buy a ‘put’. But what if the counter party wants to get out of a bad deal and they declare bankruptcy? After all if they have to buy Tesla at 620 (using the example above) and Tesla is trading at 400 that’s a significant loss.
    - songzme 7y ago
      That's thinking really far, good stuff. The trading company (Ameritrade for example) insures up to a certain point. Ameritrade wouldn't let you make that trade if you don't have enough capital to back that trade. Lets say you somehow managed to do that trade, and you declare bankruptcy. I think then Ameritrade would have to cover that cost. Then if they can't, then Ameritrade declares bankruptcy. That's as far as I reasoned.
    - Ntrails 7y ago
      You are missing the key trick - hedging! The person who sold the put to you can short some shares and lend out some money to create a "replicating portfolio" that inversely mirrors the payoff of the put option they sold you. They're making a small % on selling the put and then immunising themselves from the market movements. Who lent them the stock to short? Index funds! The people who want to make market returns, still do. Everyone is happy
    - xyzzyz 7y ago
      Typically, the other party is required to hold a margin account. If you sell a put for 100 units at $50, and the spot (current) price is $45, you're ($50-$45)*100 = $500 in the red. Your broker requires you in that situation to hold at least $500 (usually more) in cash (or cash-equivalent securities) in your margin account. If the price dips even more, your broker will ask you to add more money to your margin account quickly, or they will liquidate your position. That means that when you don't keep enough cash to cover the loss, your broker will use the cash in your account to buy a put at $50, effectively zeroing out your position. You lose the money you had in margin account, but you are no longer losing (or gaining) money on market movements.
- deleted 7y ago
  [deleted]
- pheug 7y ago
  > Who is the counterparty to these trades? Typically large trading firms, market makers. > When the market sentiment is negative, the number of these counterparties are narrow and dwindling That's why his $2600 initial investment made in a much calmer market is now worth $310k :) For the right price you'll find somebody willing to sell you the insurance you seek. But in a volatile market like today, that price may be way too much for most people.

devchix 7y ago

Who is the counterparty to these trades? When the market sentiment is negative, the number of these counterparties are narrow and dwindling, surely it's not that easy to find people who will buy a thing for $5? Maybe they would buy at $4.25 or even less?

songzme 7y ago
Good job asking from the other perspective. Here it is (over simplified to state a point, you would need to do more research). Let's say Tesla stocks are at 700. If someone offered 2k in addition to the opportunity to buy tesla at $620 / share, I'm sure many people will be lined up to buy it. Not only do you get $2000 immediately in the bank, you also get to buy tesla stock at a 10% discount. Not a bad deal.
- Insanity 7y ago
  Thank you and parent posters, this makes it clear to me!
justsid 7y ago
The counter party is set when you sell the put contract. When you set up a put contract, your broker will find a counter party (or none at all). To incetivice the counter party you pay them a premium, which they get to keep no matter what happens. Once you have the contract, it’s locked in and you have the party. That’s why you set up puts _before_ the general sentiment is that the market will go down.
- bawana 7y ago
  I don’t mean to be dense but I am still missing something. I appreciate the fact that the counter party is locked in when you buy a ‘put’. But what if the counter party wants to get out of a bad deal and they declare bankruptcy? After all if they have to buy Tesla at 620 (using the example above) and Tesla is trading at 400 that’s a significant loss.
  - songzme 7y ago
    That's thinking really far, good stuff. The trading company (Ameritrade for example) insures up to a certain point. Ameritrade wouldn't let you make that trade if you don't have enough capital to back that trade. Lets say you somehow managed to do that trade, and you declare bankruptcy. I think then Ameritrade would have to cover that cost. Then if they can't, then Ameritrade declares bankruptcy. That's as far as I reasoned.
  - Ntrails 7y ago
    You are missing the key trick - hedging! The person who sold the put to you can short some shares and lend out some money to create a "replicating portfolio" that inversely mirrors the payoff of the put option they sold you. They're making a small % on selling the put and then immunising themselves from the market movements. Who lent them the stock to short? Index funds! The people who want to make market returns, still do. Everyone is happy
  - xyzzyz 7y ago
    Typically, the other party is required to hold a margin account. If you sell a put for 100 units at $50, and the spot (current) price is $45, you're ($50-$45)*100 = $500 in the red. Your broker requires you in that situation to hold at least $500 (usually more) in cash (or cash-equivalent securities) in your margin account. If the price dips even more, your broker will ask you to add more money to your margin account quickly, or they will liquidate your position. That means that when you don't keep enough cash to cover the loss, your broker will use the cash in your account to buy a put at $50, effectively zeroing out your position. You lose the money you had in margin account, but you are no longer losing (or gaining) money on market movements.
deleted 7y ago
[deleted]
pheug 7y ago
> Who is the counterparty to these trades? Typically large trading firms, market makers. > When the market sentiment is negative, the number of these counterparties are narrow and dwindling That's why his $2600 initial investment made in a much calmer market is now worth $310k :) For the right price you'll find somebody willing to sell you the insurance you seek. But in a volatile market like today, that price may be way too much for most people.