Put Option

An options shrink that gives the buyer the right, but not the obligation, to sell the implicit in security at a pin down price and at a bias date

Updated February 4, 2022

What is a Put Option?

A put option option is an option contract that gives the buyer the right field, but not the obligation, to sell the underlie security system at a intend price ( besides known as affect price ) before or at a bias passing date. It is one of the two main types of options, the early type being a call choice. Put options are traded on assorted underlying assets such as stocks, currencies, and commodities. They protect against the decline in the price of such assets below a specific price.

With stocks, each put contract represents 100 shares of the fundamental security. Investors do not need to own the underlying asset for them to purchase or sell puts. The buyer of the put has the right, but not the obligation, to sell the asset at a specify price, within a specified time frame. The seller has the obligation to purchase the asset at the strike/offer price if the option owner exercises their put option .

Buying a Put Option

Investors buy put options as a character of insurance to protect other investments. They may buy enough puts to cover their holdings of the fundamental asset. then, if there is a disparagement in the price of the implicit in asset, the investor can sell their holdings at the strike price. Put buyers make a net income by basically holding a short-selling position.

The owner of a put choice profits when the sprout price declines below the mint price before the exhalation period. The invest buyer can exercise the option at the strike price within the pin down termination period. They exercise their option by selling the underlying standard to the put seller at the specified hit price. This means that the buyer will sell the stock at an above-the-market price, which earns the buyer a net income .

Example

Assume that the stock of ABC Company is presently trading at $ 50. Put contracts with a strike price of $ 50 are being sold at $ 3 and have an death period of six months. In total, one place costs $ 300 ( since one place represents 100 shares of ABC Company ). Assume that John buys one put choice at $ 300 for 100 shares of the company, with the anticipation that the ABC ’ s stock price will decline. The stock price is expected to fall to $ 40 by the time the ( put ) option expires. If the price does drop to $ 40, John can exercise his arrange option to sell the stock at $ 50 and earn 100 shares time $ 10 – $ 1,000. His net income net income is $ 700 ( $ 1000 – $ 300 option price ]. however, if the sprout price remains above the strike price, the ( place ) option will expire despicable. John ’ randomness loss from the investing will be capped at the price paid for the put .

Selling a Put Option

rather of buying options, investors can besides engage in the business of selling the options for a profit. Put sellers sell options with the hope that they lose respect so that they can benefit from the premiums received for the option. once puts have been sold to a buyer, the seller has the obligation to buy the underlie sprout or asset at the strike price if the option is exercised. The stock price must remain the like or increase above the fall upon monetary value for the put seller to make a profit.

If the price of the underlying stock falls below the strike price before the passing date, the buyer stands to make a profit on the sale. The buyer has the justly to sell the puts, while the seller has the obligation and must buy the puts at the specified hit price. however, if the puts remain at the lapp price or above the assume price, the buyer stands to make a loss .

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