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Current time:0:00Total duration:2:56

Video transcript

let's say that you don't like company ABCD that's right now trading for $50 a share but you don't have the stomach to short the stock because there's a possibility that you could lose an infinite amount of money if you short it you still have an option quite literally you still have an option you can buy a put option once again we're dealing with the American variation and just like an American call option an American put option gives you the the right to exercise the option anytime before the expiration date a European call or put option you can only exercise on the expiration date and the situation with a put option a call option allowed gave you the right to buy the stock at a specified price a put option is the opposite it gives you the right to sell the stock at a specified price so this little made up put option I I said I've constructed right here it's maybe being sold on in exchange for five dollars per option and it gives you the right it gives you the right to sell company ABCD at $40 a share anytime over the next month and let's see how if you were to buy this how this really is a bet that the company would go down so let's imagine the scenario where the company does what you expect it goes down and one month later you just keeps going down you're like well I better use it today because it's going to expire if I don't use it today so you you exercise the option right over there and so what this allows you to do is sell the the stock at $40 and if you don't own it that's okay because you could go and buy the stock right now on the market you knew it was going to get cheaper so you can buy it for $20 and then exercise your option and sell it for 40 so you're buying it 20 and immediately selling for 40 so you're going to be making $20 and then if you subtract out the price that you had to pay for the option you're going to have a 15 dollar profit you're going to have a 15 dollar profit over here let me scroll over to the right so you have some space and this is of course the situation with the put option this is is the put option and if your bet goes against you and the stock actually goes up it's not going to be like a short position where you can lose an unlimited amount of money in that situation let's say let's say the stock just keeps going up and up and up and up well at any point above $40 is like you know there's no point in me exercising the option so you just let it expire so in that situation you just wasted your money buying the actual option so you just lose you just lose the actual $5 even if that stock were to go up to a gazillion dollars you're not required to buy it back like you would if you were shorting it you can just let the option expire