What is a Put Option. Shhort specifically, a put option is the right to SELL 100 shares of a stock or an index at a certain price by a certain date. In the world of buying and selling stock options, choices are made in regards to which strategy is best when considering a trade. If an investor is bullish, she can buy a call or sell a put, whereas if she is bearish, she can buy a put or sell a call. About a month ago, I suggested an options spread on Aetna (AET) that made a profit of 23% after commissions in two weeks.
In the event of an interim price decline, the short seller profits, since the cost of (re)purchase is less than the proceeds received upon the initial (short) sale. Conversely, the short position closes cokpared at a loss if the ror of a shorted instrument rises prior to repurchase.Potential loss on a short sale is theoretically unlimited, as there is no theoretical limit to a rise in the price of the instrument. However, in practice, the short seller is required to post margin or collateral to cover losses, and inability to do so in a timely way would cause its broker or counterparty to liquidate the position.
To cover that obligation, you either need to buy back the option or have it expire worthless. The difference between options and rent is that the option price can change making it cheaper to cover the obli.
Compared to selling short buying a put option for aapl