Buying then selling puts is often used as a day trading strategy (SHORT trades). With very tight Strike and 1-3 days Expiration date, it allows for more rapid changes in the contract price with minimal stock price movements.
AMD, currently valued at $50 per share, has put options with a $50 strike price available for a $5 premium, expiring in 3 days. A single put contract is priced at $500 ($5 premium x 100 shares).
Given that each contract represents 100 shares, for every $1 drop in the stock price below the strike price, the option's total value increases by $100.
Put options start to become profitable, have intrinsic value, or be considered "in the money" when they fall below the break-even point. The break-even point is determined by subtracting the put's cost from the strike price, resulting in $45 in this case ($50 - $5 = $45). If the stock trades between $45 and $50, the option retains some value but doesn't yield a net profit.
On the other hand, if the stock remains above the $50 strike price, the option is deemed "out of the money" and becomes worthless. Consequently, the option value remains flat, limiting the investor's maximum loss to the premium paid for the put, which is $5 per share or $500 in total.