Additional Resources

  1. 6. Foreign Currency Options [colorado.edu]
  2. Call Option Example Stock Price Versus Exercise Price Put Option ... [albany.edu]
  3. A Discussion Of Financial Economics In Actuarial Models A ... [faculty.atu.edu]
  4. Grain Price Options Basics [extension.iastate.edu]
  5. Put And Call Options [pages.hmc.edu]
  6. Economics 252 – Financial Markets Spring 2011 Lecture 14: Options ... [oyc.yale.edu]

Definition

In finance, a put or put option is a stock market device which gives the owner of the put the right, but not the obligation, to sell an asset, at a specified price, by a predetermined date to a given party. The purchase of a put option is interpreted as a negative sentiment about the future value of the underlying. Put options are most commonly used in the stock market to protect against the decline of the price of a stock below a specified price. If the price of the stock declines below the specified price of the put option, the owner/buyer of the put has the right, but not the obligation, to sell the asset at the specified price, while the seller of the put has the obligation to purchase the asset at the strike price if the owner uses the right to do so. In this way the buyer of the put will receive at least the strike price specified, even if the asset is currently worthless.

Put Option

A put option contract gives the right, but not the obligation, to the owner to sell a specified amount of underlying security within a specified period of time, at a specified price to a given party. Opposite of call option, it is related to selling the shares rather than the right to buy them.

More about Put Option

What are the scenarios in which put option becomes valuable? If the price of an underlying stock is depreciating comparative to the strike price, put option becomes more valuable. Purchasing a put option is taken as a negative sign about the future value of the asset. These put options are mostly used in the stock market to help protect the shares if the prices of the underlying asset fall below a specified price.

If such a situation arises, the owner of put option is not obligated but has the right to sell these underlying assets at the specified price of the put option. This way the buyer will be able to get the specified strike price even if the asset is not currently worth any money. The buyer either wants to protect a long position in the underlying asset or believes that the price of the underlying asset will fall by the date put option will be applicable.

There are different specifications, models and rights when it comes to exercising the phenomenon of put option. The right to sell is dependent on the option style. If you are following a European put option, the holder is entitled to exercise the put option for a small period of time close to the point when the asset is reaching expiration. Alternatively, in case of an American put option, you can exercise the right to sell the underlying asset any point of time before the asset reaches its expiration.

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