What Is a Put?

A put is a contract sold in the options market that gives its owner the right, but not the obligation, to sell a certain amount of the underlying asset at a set price within a specific time. The buyer of a put option believes that the underlying stock will drop below the exercise price before the expiration date. 💟The exercise price is the price that the underlying asset must reach for the put option contract to hold value.

The opposite of a put option is a 澳洲幸运5官方开奖结果体彩网:call option, wh𝐆ich gives the holder the ꦡright to buy the underlying asset at a specified price on or before the contract's expiration date. A call option holder believes the price of the underlying option will rise.

Understanding Put Options

Puts are traded on various underlying assets, which can include stocks, currencies, commodities, and indexes. The buyer of a put option may sell, or exercise, the underlying asset at a specified 澳洲幸运5官方开奖结果体彩网:strike price.

♕The value of a put option increases as the price of the underlying stock decreases. On the flip side, the value of a pඣut option decreases as the underlying stock price increases.

Because put options, when exercised, provide a short position in the underlying asset, they are used for hedging purposes or to speculate on downside price action. Investors often use put options in a risk-management strategy known as a 澳洲幸运5官方开奖结果体彩网:protective put. This strategy is used as a for🎉m of investment insurance to ensure that losses in the underlying asset do not exceed a certain amount, namely the strike price.

In general, the value of a put option decreases as the expiration date approaches because the probability of the stock falling below the specified strike price decreases. When an option loses its time value, the 澳洲幸运5官方开奖结果体彩网:intrinsic value is left over, which is equivalent to the difference between the strike price minus the underlying stock price. If ꧒an option has intrinsic value, it is in the m♔oney (ITM).

澳洲幸运5官方开奖结果体彩网:Out of the money (OTM) and 澳洲幸运5官方开奖结果体彩网:at the money (ATM) put options have no intrinsic value because there would be no benefit in exercising the option. Investors could 澳洲幸运5官方开奖结果体彩网:short-sell the stock at the current higher market pr🌜ice, rather than exercising an out-of-the-money put option at an unprofitable strike price.

The possible payoff for a holder of a put is illustrated in the following diagram:ไ

Puts vs. Calls

澳洲幸运5官方开奖结果体彩网:Derivatives are financial instruments that derive value from price movements in their underlying assets, which can be a commodity sℱuch as gold or stock. Derivatives are largely used as insurance products to hedge against the risk that a particular event may occur. The two main types of derivatives used for stocks are put and call🍌 options.

A call option gives the holder the right, but not the obligation, to buy a stock at a certain price in the future. When an investღor buys a call, they expect the value of the underlying asset to go up.

A put option gives the holder the right, but not the obligation, to sell a stock at a certain price in the future. When an investor purchases a put, they expect the underlying asset to decline in price. If it does, they may sell or exercise the option and gain a profit. An investor can also write a put option for another investor to buy, in which case, they would not expeℱct the stock's price to drop below the exercise price.

Example: How Does a Put Option Work?

An investor purchases one put option contꦍract on ABC company for $100. Each option contract covers 100 shares. The exercise price of th🃏e shares is $10, and the current ABC share price is $12. This put option contract has given the investor the right, but not the obligation, to sell 100 shares of ABC at $10.

If ABC shares drop to $8, the investor's put option is in the money (ITM)—which means that the strike price is below the market price of the underlying asset—and they can close their option position by selꦚling the contract on the open market.

On the other hand, they can purchase 100 shares of ABC at the existing market price of $8, and then exercise their contract to sell the shares for $10. Disregarding commissions, the profit for this position is $200, or 100 x ($10 - $8). Remember that the investor paid a $100 premium for the put option, giving them the right to sell their shares at the exercise price. Factoring in this initial cost, their total profit is $200 - $100 = $100.

As another way of 澳洲幸运5官方开奖结果体彩网:working a put option as a hedge, if the investor in the previous example already owns 100 shares of ABC company, that position would be called a 澳洲幸运5官方开奖结果体彩网:married put and could serve as a hedge against a decline in the shar💝e🧜 price.

Explain Like I'm Five

A put option gives traders the right to sell an asset at a certain price, even if the market price of that asset is lower. You don't need to own the underlying asset to buy and sell puts. Traders buy put options to reduce their losses if they think their assets might lose value.

Suppose you own shares in a certain stock and are worried that the price will fall, but you are reluctant to sell. You might buy a put option that gives you the right to sell that stock in the future, at today's price. Even if the stock price drops, you will still be able to sell that stock at today's price until the put option expires.

The Bottom Line

A put option gives the holder the right but not the obligation to sell an underlying asset at a certain price within a certain period. Investors and traders buy puts if they expect the price of the underlying asset to drop, allowing them to profit by selling or exer🌳cising the put. A put is often used in hedging, but can also be used for speculative trading practices.