Buying Puts

ZYX is between $50 and $47.00 at expiration

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With ZYX exactly at the strike price of $50 at expiration, the 50 put would be exactly at-the-money and have no value. With ZYX at the break-even point of $47.00 at expiration the put's intrinsic value would be $3.00, or its initial cost. With ZYX closing between $50 and $47.00 at expiration, the 50 put will be in-the-money and have an intrinsic value of less than its initial cost. In this case the option could be sold to recoup some of its original purchase price resulting in a partial loss for the position.

For example, ZYX closes at $48 at expiration. The put's intrinsic value at this point would be:

  $50.00  put strike price
 -$48.00  ZYX stock price
   $2.00   intrinsic value

ZYX did decline in value, but not as much as anticipated. The option that cost $3.00 is now worth $2, so the investor can sell the put and recoup some of its initial purchase price. If the ZYX 50 put is sold for its intrinsic value of $2 then the loss for the position would be:

$3.00   premium initially paid for put
$2.00   premium received at put’s sale
$1.00   loss

The put could also be exercised. 100 shares of ZYX would be sold at the contract's strike price of $50 per share less the put premium paid, or a net price of $47 per share. But if those shares aren't owned, the investor would then have a short stock position along with its inherent margin requirements, possibility of margin calls, and unlimited upside stock price risk.