A:

Once a put option contract has been exercised, that contract does not exist anymore. A put option grants you the right to sell a stock at a specified price at a specific time. The holder of a put option expects the price of the underlying stock to decline. When the price of that stock goes down, the holder of the put option has two choices: a) sell the put option for profit, or b) exercise the option. You cannot exercise the option and then sell it at the same time; it has to be one or the other.

When a put option is in-the-money, depending on the rules of the brokerage firm you are using, instructions are submitted to your broker or it is automatically exercised. If the option is exercised, the holder buys the stock at its current price and sells the same stock at its exercise price. For example, if the put option contract for stock A specifies the exercise price at $10 at a specific date, and the actual price on that date is $8, the option holder exercises the contract by buying stock at $8 and selling it for $10 to get a $2 profit. When that option contract is exercised, it no longer exists.

To learn more, see our Options Basics Tutorial.

This question was answered by Chizoba Morah.

RELATED FAQS

  1. How does a forward contract differ from a call option?

    Find out more about forward contracts, call options, the mechanics of these financial instruments and the difference between ...
  2. What are the main risks associated with trading derivatives?

    Understand derivatives trading and learn about the primary risks usually associated with trading in the derivatives market, ...
  3. How can an investor profit from a fall in the utilities sector?

    Learn how an investor can profit from a fall in the utilities sector by employing speculation methods such as short selling ...
  4. What is the difference between derivatives and options?

    Learn how options are one type of derivative and how equity options derive their value from a stock, and understand other ...
RELATED TERMS
  1. Strike Width

    The difference between the strike price of an option and the ...
  2. Inverse Transaction

    A transaction that can cancel out a forward contract that has ...
  3. Reference Equity

    The underlying equity that an investor is seeking price movement ...
  4. Boundary Conditions

    The maximum and minimum values used to indicate where the price ...
  5. Delta-Gamma Hedging

    An options hedging strategy that combines a delta hedge and a ...
  6. Gamma Hedging

    An options hedging strategy designed to reduce or eliminate the ...

You May Also Like

Related Articles
  1. Options & Futures

    How does a forward contract differ from ...

  2. Options & Futures

    Tesla Stock Too Expensive? Trade Tesla ...

  3. Options & Futures

    Stock Options To Trade On Intraday Momentum ...

  4. Mutual Funds & ETFs

    4 Ways You Can Invest In Gold Without ...

  5. Active Trading Fundamentals

    How To Short Amazon Stock

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!