what does it mean to buy a put

What is a Put Option?

A put choice is an option contract that gives the buyer the right, but not the obligation, to sell the underlying security at a specified price (also known equally strike price Strike Toll The strike cost is the price at which the holder of the selection can exercise the option to purchase or sell an underlying security, depending on ) earlier or at a predetermined expiration date. It is one of the ii principal types of options, the other type being a phone call option Call Choice A call option is a grade of a derivatives contract that gives the call option heir-apparent the right, just non the obligation, to buy a fiscal instrument at a specific cost . Put options are traded on various underlying assets such as stocks, currencies, and bolt. They protect confronting the decline in the price of such assets below a specific price.

With stocks, each put contract represents 100 shares of the underlying security. Investors practise non need to ain the underlying asset for them to purchase or sell puts. The buyer of the put has the correct, but not the obligation, to sell the asset at a specified price, within a specified time frame.

The seller has the obligation to buy the nugget at the strike/offer cost if the option owner exercises their put option.

Buying a Put Selection

Investors buy put options equally a type of insurance to protect other investments. They may buy enough puts to cover their holdings of the underlying asset. Then, if in that location is a depreciation Depreciation Methods The most common types of depreciation methods include directly-line, double declining balance, units of product, and sum of years digits. in the price of the underlying asset, the investor can sell their holdings at the strike cost. Put buyers make a turn a profit past essentially property a short-selling position.

The possessor of a put option profits when the stock cost declines below the strike price before the expiration flow. The put buyer can exercise the option at the strike price within the specified expiration menstruum. They exercise their option by selling the underlying stock to the put seller at the specified strike price. This means that the buyer volition sell the stock at an in a higher place-the-market cost, which earns the buyer a profit.

Example

Assume that the stock of ABC Company is currently trading at $fifty. Put contracts with a strike price of $50 are beingness sold at $3 and accept an death flow of half dozen months. In total, ane put costs $300 (since ane put represents 100 shares of ABC Visitor). Assume that John buys one put option at $300 for 100 shares of the company, with the expectation that the ABC's stock toll will decline. The stock price is expected to fall to $40 past the time the (put) option expires.

If the price does drib to $twoscore, John tin can exercise his put option to sell the stock at $50 and earn 100 shares times $10 – $one,000. His cyberspace profit is $700 ($1000 – $300 selection price]. However, if the stock price remains above the strike price, the (put) option will elapse worthless. John'southward loss from the investment will exist capped at the toll paid for the put.

Selling a Put Option

Instead of buying options, investors can as well appoint in the concern of selling the options for a turn a profit. Put sellers sell options with the hope that they lose value then that they tin benefit from the premiums received for the option. Once puts have been sold to a buyer, the seller has the obligation to purchase the underlying stock or asset at the strike price if the option is exercised. The stock price must remain the aforementioned or increase in a higher place the strike toll for the put seller to brand a turn a profit.

If the toll of the underlying stock falls below the strike price before the expiration date, the heir-apparent stands to make a profit on the sale. The buyer has the right to sell the puts, while the seller has the obligation and must purchase the puts at the specified strike toll. However, if the puts remain at the same toll or above the strike cost, the buyer stands to make a loss.

More Resources

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