In this quick tutorial we'll again use AAPL stock as an example and go directly to my broker platform and walk through the steps to buy a put option anticipating that AAPL stock might drop the future. Just like we did with our tutorial on buying a call option, we'll help you determine your break-even price and expiration time for your put option which is calculated slightly different then a call option.
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In this video tutorial, I’m going to go over the specifics of buying a put option on your broker platform. I’m going to show you guys everything from how to look up a trade, how to look up the option chains and how to find the pricing and place the exact order that you want for that purchase.
Let’s get right into it here as always. And I'm going to go right to my Thinkorswim platform. This is what my broker’s platform looks like. Yours maybe just a little bit different, but this is what mine looks like.
And usually, they’re going to have some trade or enter order screen. I'm just in the trade tab, and I’m under “all products” here. Now, the first thing you always want to do is just find the underlying stock or ETF that you want to trade.
In this case, I’ve already typed in IWM, but I could easily type in GE for example if I wanted to trade General Electric or if I want to trade Bank of America, I could type BAC, but let’s just use Apple for example which is AAPL.
And you can see that the Apple stock comes up with all the information for the day and then below it, what's important for us is the options. Below there, we have the option pricing chain for the different contract months.
I can easily toggle these months on and off depending on which month I want to focus on. For example, let's say we want to focus on the January 2012 option contracts. I would just open this, toggle and there would be the option contracts for both the calls which are on the left side and then the puts which are on the right side.
Again, we’re going to focus on the calls. Now, what I have up here are just four different columns that give me a little bit more particular pricing information for these calls. I have the last which is the last price that the call option traded for, I have the net change which is the net change on the day for that particular option, and then I have the bid and the ask which always shows up.
Down the middle, you can see the expiration date is right down the middle, so January 2012 and then all of our different strike prices are right down the middle as well in blue. Let’s say for example that we were bearish on Apple and we wanted to take a look at some of the puts.
We wanted to buy some puts on Apple. We thought Apple is going to go down by January, so we wanted to buy some puts. Let’s say that Apple is trading at 395 right now as of this video and we wanted to buy the 385 puts.
We would simply click on the “ask” which is the asking price for those put options, and you can see an order dialogue pops up down here to go over our specific order. Let’s go over it together. It’s a single leg option, so it’s just one option.
It’s not a complex strategy. The side of the trade that we’re on is on the buy side. You can easily change this to the sell side, and it changes from red to green on our platform. We only want to buy one quantity of this put option.
I could easily go in here and change this. And let’s say I wanted to buy 14 or I wanted to buy 35. You can type in as many as you want, but let’s just keep it simple for this video and say we’re going to buy just one put contract. The symbol we’re going to trade is Apple which is AAPL; the expiration period is January 2012, the strike price is 385, and the type of option we’re going to buy is a put option.
You can easily change this to a call or whatever you want, but let’s just keep it at a put. Now, the price that we have here is the price that came up on our “ask” when we clicked it. Now, you can see that the last traded price was about $5 less than what the price is here, so I’m going to change this to match that last price, so 20.40.
Now, I have a price of 20.40 which is a little bit less than what the asking price is, but it is the last price that was traded for these put options. We have this as a limit order, and it’s just good for today, routed through the best possible exchange for fills and accuracy. I clicked confirm and send and then once more, I get one more dialogue box that pops up.
It gives me an overview of the entire position that I want to enter, the order that I want to enter. It’s telling me the description: I want to buy one Apple, 100 which is just the contract multiplier, January 2012, 385 strike price put for 20.4 limit order.
It already calculates our breakeven price. Apple needs to drop down to at least 36,460. Our max profit is 36,460 if Apple drops all the way to 0. Our max loss is just the amount of the put contract that we purchased.
And you can see that it calculates a cost with the commissions and then it adjusts your buying power and your resulting balances for your accounts. This is how you would go ahead and purchase a put option for any security that you're interested in.
Again just to recap, we’re going to type in the ticker symbol, then we're going to look up the contract expiration month that we want for that option, then we're going to decide if it’s a call or put and then find the actual last price of that particular strike price that we wanted to trade.
Once we have that order in, then it’s a good idea to go through the order once or twice just to make sure that you have all the particular details that you want.
It’s very easy when you're getting started and even nowadays, trading for so many years, to get caught up in the orders, you think you know what you’re doing with them, but it’s very easy to easily miss something and incorrectly buy or incorrectly sell a different strike price or a different contract month than you wanted.
It's very, very important that you go back through with a fine-tooth comb and look over your orders just to make sure it is exactly the way you want it. Hey, thanks for watching this video from Option Alpha.
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