Explore Your Options by Tom Gentile
PUTS DON'T MAKE MONEY WHEN STOCK FALLS
I am trying to understand why I did not make any money on a put option. I am hoping you can shed some light. On October 23, 2008, I bought an Xyz put option with the 15 strike price. I bought two contracts at $2.10, or $420 total. The stock dropped to near the strike price. I sold on November 11 for $1.95 and collected $390. I lost $30 even though the stock dropped the way I thought it would. How can this happen?
In order to answer your question, it is important that you understand that several factors will influence the value of a stock option, not just the stock price. Certainly, the price of the stock is often the most important. If I buy a call and the stock moves higher, chances are the call will increase in value. On the other hand, if I buy a put and the stock moves lower, the put will probably increase in value. Most traders understand this and, for that reason, many investors buy puts and calls as a leveraged or cheaper way to play moves in the stock.