It seems counterintuitive that you would be able to profit from an increase in the price of an underlying asset by using a product that is most often associated with gaining from falling prices. However, as you'll see with the two methods below, it is possible.

A put option gives the purchaser the right to sell the underlying at the agreed upon strike price, regardless of how far the price declines. For this right, the trader pays a premium, which in turn is kept by the writer of the option if the price of the asset closes above the strike price at expiration. Looking at this transaction from the perspective of the option writer rather than that of the purchaser, it becomes apparent that when an option trader has a bullish outlook on a security, he or she can collect a premium by selling put options and keep the premium when the options expire worthless.

The downside to using this strategy is the amount of risk associated with holding a short position in a put option. Therefore, this strategy should only be attempted by traders who understand all the risks, so that the likelihood of significant losses is reduced. (To learn more about this strategy, see Introduction To Put Writing.)

One method of avoiding the risk associated with a short put option is to implement a strategy known as a bull put spread. This strategy is created by selling one put option and buying another with a lower strike price. In this case, the lower put option protects the trader from large declines in the price of the underlying because the gains from a move below the strike help offset the losses the trader incurs when the original holder of the long position exercises his or her options. This strategy also has a limited profit potential equal to the difference between the amount collected from selling the option and the price paid to acquire the other option. Profiting from an increase in the price of an underlying asset by using a product that is associated with declining prices may seem attractive, but it is extremely important that you have a good understanding of the risks and payoffs associated with both of these strategies before you incorporate them into your trading.

For further reading on put options, see Trading The QQQQ With In-The-Money Put Spreads.

  1. When is a put option considered to be "in the money"?

    Learn about put options, what they are, how these financial derivatives operate and when put options are considered to be ... Read Answer >>
  2. When does one sell a put option, and when does one sell a call option?

    The incorporation of options into all types of investment strategies has quickly grown in popularity among individual investors. ... Read Answer >>
  3. How do I set a strike price in a put?

    Learn about put options, considerations to make before you select strike prices and how to select strike prices for your ... Read Answer >>
  4. Are there any risks involved in trading put options through a traditional broker?

    Explore put option trading and different put option strategies. Learn the difference between traditional, online and direct ... Read Answer >>
  5. Are put options more difficult to trade than call options?

    Learn about the difficulty of trading both call and put options. Explore how put options earn profits with underlying assets ... Read Answer >>
  6. Do options make more sense during bull or bear markets?

    Understand how options may be used in both bullish and bearish markets, and learn the basics of options pricing and certain ... Read Answer >>
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