How can put options be used to buy shares at a lower price?
"Cart's answer describes well one aspects of puts: protective puts; which means using puts as insurance against a decline in the price of shares that you own.  That's a popular use of puts.  But I think the wording of your question is angling for another strategy: Writing puts. Consider: Cart's strategy refers to the buyer of a put.  But, on the transaction's other side is a seller of the put – and ultimately somebody created or wrote that put contract in the first place!  That first seller of the put – that is, the seller that isn't just selling one they themselves bought – is the put writer. When you write a put, you are taking on the obligation to buy the other side's stock at the put exercise price if the stock price falls below that exercise price by the expiry date.  For taking on the obligation, you receive a premium, like how an insurance company charges a premium to insure against a loss. Example:  Imagine ABC Co. stock is trading at $25.00.  You write a put contract agreeing to buy 100 shares of ABC at $20.00 per share (the exercise price) by a given expiration date.  Say you receive $2.00/share premium from the put buyer.  You now have the obligation to purchase the shares from the put buyer in the event they are below $20.00 per share when the option expires – or, technically any time before then, if the buyer chooses to exercise the option early. Assuming no early assignment, one of two things will happen at the option expiration date: ABC trades at or above $20.00 per share. In this case, the put option will expire worthless in the hands of the put buyer.  You will have pocketed the $200 and be absolved from your obligation.  This case, where ABC trades above the exercise price, is the maximum profit potential. ABC trades below $20.00 per share.  In this case, the put option will be assigned and you'll need to fork over $2000 to the put buyer in exchange for his 100 ABC shares.  If those shares are worth less than $18.00 in the market, then you've suffered a loss to the extent they are below that price (times 100), because remember – you pocketed $200 premium in the first place.  If the shares are between $18.00 to $20.00, you're still profitable, but not to the full extent of the premium received. You can see that by having written a put it's possible to acquire ABC stock at a price lower than the market price – because you received some premium in the process of writing your put.  If you don't ""succeed"" in acquiring shares on your first write (because the shares didn't get below the exercise price), you can continue to write puts and collect premium until you do get assigned. I have read the book ""Money for Nothing (And Your Stocks for FREE!)"" by Canadian author Derek Foster.  Despite the flashy title, the book essentially describes Derek's strategy for writing puts against dividend-paying value stocks he would love to own.  Derek picks quality companies that pay a dividend, and uses put writing to get in at lower-than-market prices.  Four Pillars reviewed the book and interviewed Derek Foster: Money for Nothing: Book Review and Interview with Derek Foster. Writing puts entails risk.  If the stock price drops to zero then you'll end up paying the put exercise price to acquire worthless shares!  So your down-side can easily be multiples of the premium collected.  Don't do this until and unless you understand exactly how this works.  It's advanced. Note also that your broker isn't likely to permit you to write puts without having sufficient cash or margin in your account to cover the case where you are forced to buy the stock.  You're better off having cash to secure your put buys, otherwise you may be forced into leverage (borrowing) when assigned.  Additional Resources: The Montreal Exchange options guide (PDF) that Cart already linked to is an excellent free resource for learning about options.  Refer to page 39, ""Writing secured put options"", for the strategy above. Other major options exchanges and organizations also provide high-quality free learning material:" If you are looking for a simple formula or buying order / strategy to guarantee a lower buying price, unfortunately this does not exist.  Otherwise, all investors would employ this strategy and the financial markets would no longer have an validity (aka arbitrage).  Buying any investment contains a certain level of risk (other than US treasuries of course). Having said that, there are many option buying strategies that can employed to help increase your ROR or hedge an existing position.  Most of these strategies are based a predicted future direction of a stock on the investor's part.  For example, you hold the Ford stock and feel they are releasing their earnings report next week.  You feel that they will not meet investors' expectations.  You don't want to sell your shares but what you can do is buy put options.  If the stock does indeed go down then you make money on your put options. Here is a document on options.  It is moderately technical but very good if you want a good introduction on the subject.  The strategy that I described above is on pg 33. http://www.m-x.ca/f_publications_en/en.guide.options.pdf
"Alrighty.  So your question is, how confident are people that FB stock will close above a certain price at a certain time.  A ""call"" option contract allows you to buy shares in the future at a certain price.  FB calls are available for March of 2013.  The number in the ""strike"" column is the price you can buy FB stock at on the given date. Let's take the ""33.00"" strike.  This allows you to buy FB shares at $33 each next March.  If at that time it turns out they're worth $50 each, you can buy them at $33, then immediately sell them on the open market for $50, making money.  The person selling you the option knows that there's a chance the price will be above $33 in March, so he's going to charge you a few bucks to cover that possibility.  In this case, he's charging you $5.30 (as of me writing this).  So, you can have the option to buy FB shares at $33 each for $5.30.  This means the guy selling you the option is reasonably confident that in March, FB stock will be at or under $38.50, otherwise he'd lose money when you exercised the option.    Therefore, $38.50 is the option market's best guess as to the highest FB stock will be going for in March." "A warrant is similar to a call option (the right to buy stock at a certain price), with the difference that warrants are filled by the issuing company with new shares, diluting the existing shareholders' ownership. The language is a bit confusing, but how I interpret it is: So your 9,000 shares will get you 3,000 shares and 3,000 warrants (the right to buy shares at a maximum price of 0.27 between April 2, 2018 and April 30, 2018.   I think the phrase ""The subscription price is SEK 0.27 per Unit"" means that you can buy each unit for 0.27 SKE (which gets you one share and one option to buy another share." First, the stock does represent a share of ownership and if you have a different interpretation I'd like to see proof of that. Secondly, when the IPO or secondary offering happened that put those shares into the market int he first place, the company did receive proceeds from selling those shares. While others may profit afterward, it is worth noting that more than a few companies will have secondary offerings, convertible debt, incentive stock options and restricted stock that may be used down the road that are all dependent upon the current trading share price in terms of how useful these can be used to fund operations, pay executives and so forth. Third, if someone buys up enough shares of the company then they gain control of the company which while you aren't mentioning this case, it is something to note as some individuals buy stock so that they can take over the company which happens. Usually this has more of an overall plan but the idea here is that getting that 50%+1 control of the company's voting shares are an important piece to things here. I cannot explain how the derivative is created in specific, because I have never actually built one. However, [Investopedia](http://www.investopedia.com/terms/m/mitts.asp#axzz1wwZTADu5) suggests to me that the concept is quite simple. They are selling a synthetic protective put.   An individual could quite easily remake the payout structure of these securities -  1. Buy the share or index in which you are interested 2. Buy a put option on the same asset with a strike price as your purchase price 3. If you are interested in the target-term aspect, you ought to buy European puts. American options will be more expensive, but give you more flexibility to sell your share. 4. At the maturity of your option, if the share is below the price you paid you can exercise your option and still have your principal. If it is above, leave your option alone and sell your share for profit. "For new shares to be successfully sold, the price has to be below market price. If you currently own shares of that company, you should always get an option to buy those newly sold shares at that discounted price. The number of options depends on the relative number of shares you hold. Lets say you own 100 out of 1000 shares, currently priced at $10. 100 new shares are to be sold at $9. Since you are holding 10% of all shares, you have the option (i.e. the right) to buy 10 new (cheaper) shares (10% of 100) before anybody else can buy them. Theoretically, the money you save by getting the shares at a discounted price is equal to the money you lose by the share's value being diluted. So, if you're a shareholder and the company is increasing it's capital, you're given the right to ""go with it""." "You can certainly try to do this, but it's risky and very expensive. Consider a simplified example. You buy 1000 shares of ABC at $1.00 each, with the intention of selling them all when the price reaches $1.01. Rinse and repeat, right? You might think the example above will net you a tidy $10 profit. But you have to factor in trade commissions. Most brokerages are going to charge you per trade. Fidelity for example, want $4.95 per trade; that's for both the buying and the selling. So your 1000 shares actually cost you $1004.95, and then when you sell them for $1.01 each, they take their $4.95 fee again, leaving you with a measly $1.10 in profit. Meanwhile, your entire $1000 stake was at risk of never making ANY profit - you may have been unlucky enough to buy at the stock's peak price before a slow (or even fast) decline towards eventual bankruptcy.  The other problem with this is that you need a stock that is both stable and volatile at the same time. You need the volatility to ensure the price keeps swinging between your buy and sell thresholds, over and over again. You need stability to ensure it doesn't move well away from those thresholds altogether. If it doesn't have this weird stable-volatility thing, then you are shooting yourself in the foot by not holding the stock for longer: why sell for $1.01 if it goes up to $1.10 ten minutes later? Why buy for $1.00 when it keeps dropping to $0.95 ten minutes later? Your strategy means you are always taking the smallest possible profit, for the same amount of risk. Another method might be to only trade each stock once, and hope that you never pick a loser. Perhaps look for something that has been steadily climbing in price, buy, make your tiny profit, then move on to the next company. However you still have the risk of buying something at it's peak price and being in for an awfully long wait before you can cash out (if ever). And if all that wasn't enough to put you off, brokerages have special rules for ""frequent traders"" that just make it all the more complicated. Not worth the hassle IMO." "A simple way to ask the question might be to say ""why can't I just use the same trick with my own shares to make money on the way down? Why is borrowing someone else's shares necessary to make the concept a viable one? Why isn't it just the inverse of 'going long'?"" A simple way to think about it is this: to make money by trading something, you must buy it for less than you sell it for.  This applies to stocks like anything else.  If you believe the price will go up, then you can buy them first and sell them later for a higher price.  But if you believe the price will go down, the only way to buy low and sell high is to sell first and buy later.  If you buy the stock and it goes down, any sale you make will lose you money. I'm still not sure I fully understand the point of your example, but one thing to note is that in both cases (i.e., whether you buy the share back at the end or not), you lost money.  You say that you ""made $5 on the share price dropping"", but that isn't true at all: you can see in your example that your final account balance is negative in both cases.  You paid $20 for the shares but only got $15 back; you lost $5 (or, in the other version of your example, paid $20 and got back $5 plus the depreciated shares). If you had bought the shares for $20 and sold them for, say, $25, then your account would end up with a positive $5 balance; that is what a gain would look like.  But you can't achieve that if you buy the shares for $20 and later sell them for less. At a guess, you seem to be confusing the concept of making a profit with the concept of cutting your losses.  It is true that if you buy the shares for $20 and sell them for $15, you lose only $5, whereas if you buy them for $20 and sell for $10, you lose the larger amount of $10.  But those are both losses.  Selling ""early"" as the price goes down doesn't make you any money; it just stops you from losing more money than you would if you sold later." Exchange traded options are issued in a way that there is no counter party risk.  Consider, stocks and options are held in street name. So, for example, if I am short and you are long shares, no matter what happens on my end, your shares are yours.  To be complete, it's possible to enter into a direct deal, where you have a contract for some non-standard option, but that would be very rare for the average investor.