Put

DEFINITION of Put

Put is an option that gives the purchaser the right, but not the obligation, to sell an asset at a certain price before the option expires.

WHAT IT IS IN ESSENCE

They differ from call options, which give the purchaser the right to buy an asset at a certain price before the option expires.

Both options will determine the amount of the asset at the start. With the strike price and the expiry (the length of time the option will be available for).

The buyer of this option pays a premium to the writer (seller) to buy the option.

If the buyer does not exercise the option by selling the asset before the option expires, it will cancel and the writer will take the premium as profit.

The writer of a call option is expecting that the asset they have agreed to sell will not drop in price beyond the strike price. While the buyer is expecting that it will go down.

So say, it is the contract in which the holder (buyer) has the right to sell a specified quantity of a security. At a specified price (strike price) within a fixed period of time (until its expiration).

For the writer (seller) of this option, it represents an obligation to buy the underlying security. And at the strike price if the option is exercised. The put option writer is paid a premium for taking on the risk. Of course, associated with the obligation.

HOW TO USE

If you own an underlying stock or other security, a protective put position involves purchasing put options, on a share-for-share basis, on the same stock.

This is in contrast to a covered call which involves selling a call on a stock you own. Options traders can think of purchasing a put to protect a long stock position much like a synthetic long call.

The primary benefit of a protective put strategy is it helps protect against losses. The most, during a price decline in the underlying asset. While still allowing for capital appreciation if the stock increases in value. 

Of course, there is a cost to any protection: in the case of a protective put, it is the price of the option.

Essentially, if the stock goes up, you have great profit potential (less the cost of the put options).  And if the stock goes down, the put goes up in value to offset losses on the stock.

 

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