Put

AAA

DEFINITION of 'Put'

An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying asset at a set price within a specified time. The buyer of a put option estimates that the underlying asset will drop below the exercise price before the expiration date.

The possible payoff for a holder of a put option contract is illustrated by the following diagram:


Put

INVESTOPEDIA EXPLAINS 'Put'

When an investor purchases a put, he or she expects the underlying asset will decline in price. The investor will then profit by either selling the put options at a profit, or by exercising the option. If an investor writes a put contract, he or she is estimating the stock will not decline below the exercise price, and will not fall significantly below the exercise price.

Consider if an investor purchased one put option contract for 100 shares of ABC Co. for $1, or $100 ($1*100). The exercise price of the shares is $10 and the current ABC share price is $12. This contract has given the investor the right, but not the obligation, to sell shares of ABC at $10.

If ABC shares drop to $8, the investor's put option is in-the-money and he can close his option position by selling the contract on the open market. On the other hand, he can purchase 100 shares of ABC at the existing market price of $8, then exercise his contract to sell the shares for $10. Excluding commissions, the total profit for this position would be $100 [100*($10 - $8 - $1)]. If the investor already owned 100 shares of ABC, this is called a "married put" position and serves as a hedge against a decline in share price.

RELATED TERMS
  1. AC-DC Option

    A derivative that gives an investor the right - but not the obligation ...
  2. Time Value

    The portion of an option's premium that is attributable to the ...
  3. Derivative

    A security whose price is dependent upon or derived from one ...
  4. Married Put

    An option strategy whereby an investor, holding a long position ...
  5. Sell To Close

    In options trading, an order to sell an option that you own and ...
  6. Sell To Open

    A phrase used by many brokerages to represent the opening of ...
Related Articles
  1. Introduction To Put Writing
    Options & Futures

    Introduction To Put Writing

  2. How To Avoid Closing Options Below Intrinsic ...
    Options & Futures

    How To Avoid Closing Options Below Intrinsic ...

  3. Using LEAPS With Collars
    Options & Futures

    Using LEAPS With Collars

  4. Tips For Series 7 Options Questions
    Professionals

    Tips For Series 7 Options Questions

comments powered by Disqus
Hot Definitions
  1. Ghosting

    An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. ...
  2. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  3. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  4. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  5. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  6. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
Trading Center