Puts Explained – Options Trading during a Recession

What are puts? What’s a Call? Should you trade options during a recession? If you’ve wondered any of these questions, stay put (hah!). We’ll explain some of what you might be hearing, and even some ways you might be able to protect your accounts during a downturn!

Puts Explained

If you haven’t read our other post on options, you can read it here. Otherwise, we’ll do a quick recap:

A Put is the right but not the obligation to sell.

So basically, it is the option to sell a stock at a particular price. You would buy a put when you think the stock is going to go down.

Let’s do a super easy example to help explain puts:

You open your options trading app and see ABC stock is trading at $100. (We like Robinhood for your basic stock and options trading. Read more about Robinhood here). You think the stock is going to fall so you buy a $98 PUT contract for $2.50.

So what does that mean? This means you paid $250 for the option of selling 100 shares of ABC stock at $98.

Let’s address a few things:

1. Why does it cost you $250? In the app it said $2.50? Options prices are shown per share, but they are traded in contracts for 100 shares. So always multiply the price you see by 100 and that’s the price per contract
2. When would this put option be worth it? The break even for this option is $95.50 (98-2.50). So if you think the stock will fall below $95.50, this is a good play.
3. Why are options so expensive? Options pricing is very complicated. There are a lot of factors, such as time until expiration and volatility. Basically, the more uncertainty there is, the more expensive options will be. Uncertainty could be in the form of time, or volatility. You can read more about options pricing here.

How is a Put Different from a Call?

As we already know – a put is the right but not the obligation to sell a contract.

A Call is the right but not the obligation to buy a call.

In it’s most simple form, you’d buy a call if you expect the stock to rise and you’d buy a put if you expect the stock to fall.

There are a lot of complex trading strategies out there, but this article helped. There you go… puts explained.