Here's what I think I understand:
- Put options allow the underlying security to be sold at the strike price
- Call options allow the underlying security to be purchased at the strike price
- Each option contract allows 100 shares of the underlying security to be bought / sold
- The strike price is the price that each share of the underlying security can be bought / sold
HD - Nov 2016 - PUT
Bid 62.05 Bid Size 96
Ask 65.80 Ask Size 45
Strike Price 195.00
In my limited understanding, this means that I can purchase 1 contract for $65.80 and then in Nov 2016 sell 100 shares of HD for $195 each. Given that HD is currently trading for 131.85 that would equate to a gain of over 47% (195*100-65.80)/(131.85*100) in 6 months.
I'm sure I am misunderstanding something because the numbers are too good to be true! Could someone please point out my error?
I suspect that I am mis-interpreting the price of the contract and it's actually 65.80 x 100, thus I am paying $65.80 per share; betting that the price will be 195 in 6 months. I'm not sure why I would do this though; as the share price would need to appreciate to $197.65 (131.85 + 65.80) for me to even break even.