When the markets at an all time I, I decided to make a very small purchase due to not having a lot a cash. On Oct 29th, I bought Bank of Nova Scotia Dec 21 2013 62.50 Put Option at a cost of 60.95 including commissions. If the price of the stock goes down then the value of the Put option goes up.
I have 3 options when it comes this trade.
(1) If the market goes up, I can do nothing and let the option expire worthless. My loss would be my overall purchase price of the option
(2) I can exercise the option, which mean I get to purchase the 100 shares at 62.50 of Bank of Nova Scotia.
(3) I can Sell to Close my option to another trader or investor.
The closer I am to the expiration day the effect of the market will have less and less effect of the price of the option. I am not an investment professional, so I won't go into detail about why happens.
Buying an option, whether a call option of put option, allows an investor or trader to control 100 shares of a company for very little money.