What is a put option?
If you’re interested in trading options, you need to understand the difference between the two major types—calls and puts. First, let’s review how options work. An option is a contract. It gives you the right—but not the obligation—to buy or sell an asset at a specific price before a certain date. As I mentioned, there are two types of options. One is the put option. It gives you the right to sell an asset at a certain price by a certain date. That may seem complicated, so let’s look at an example. Let’s say you own 100 shares of a company called Lemon Car Dealers, which you bought at $100 a share, and is still trading at $100 a share. For some reason, you think the stock might decline in value, and you want to protect yourself. After all, if the company goes out of business, you’d be out 100 shares at $100 each, which is a total of $10,000. So, you buy an options contract for $1,000. This particular contract lets you sell 100 shares of Lemon Car Dealers for $80 a share. As you suspect
A put option is a type of financial instrument known as a derivative. It is basically an agreement between parties to exchange ownership of a stock at an agreed upon price within a certain time period. The exchange of the stock is optional and the owner of the put option decides whether it takes place. The agreed upon price of the exchange is called the strike price. The date on which the put option expires is the expiry date. The amount of money required to purchase this put option is called the premium. If the exchange takes place, then one is said to have exercised the put option. Put option premiums are always quoted per stock, but sold in lots of 100 shares minimum. Put options are always an agreement about being able to sell the stock at the agreed upon price. Put options come in both European style and American style. European style put options are sold on European exchanges, while American style put options are sold in North American exchanges. The difference is quite simple. E
A put option is a contractual agreement between the buyer and the seller of the option that gives the right, but not the obligation, for the put holder to force the seller of the put to purchase the underlying security at the strike price on the options expiration date. The buyer of a put option believes that the stock may move lower and therefore, decides to purchase the insurance to protect the downside risk and thereby locks in a sales price if the stock moves lower. See the option risk profile of a put to understand the risks and rewards. Puts may also be used for speculative purposes; if you short a put without it being a part of a larger strategy, this is called a “naked” put. The seller of a naked put is taking a bet that the stock will move higher and that the premium that was received will expire worthless. You can generally say that the price of a put option moves lower as the stock moves higher and visa versa. The risk of buying a put option is merely the amount of money tha
