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.

VIDEO

Loading the player...
RELATED TERMS
  1. AC-DC Option

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

    1. The period of time between the opening and closing of some ...
  3. Option

    A financial derivative that represents a contract sold by one ...
  4. Married Put

    An option strategy whereby an investor, holding a long position ...
  5. Time Value

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

    A security whose price is dependent upon or derived from one ...
RELATED FAQS
  1. How can an investor profit from a fall in the price of bank stocks?

    Investors can profit from a fall in the price of bank stocks by shorting the stock or buying put options on bank stocks. ... Read Full Answer >>
  2. Are put options more difficult to trade than call options?

    Both put and call options trading are about the same level of difficulty. Put options, however, may be slightly more difficult ... Read Full Answer >>
  3. Can I make money using put options when prices are going up?

    It seems counterintuitive that you would be able to profit from an increase in the price of an underlying asset by using ... Read Full Answer >>
  4. Short selling vs. purchasing a put option: how do the payoffs differ?

    Purchasing a put option and entering into a short sale transaction are the two most common ways for traders to profit when ... Read Full Answer >>
  5. When does one sell a put option, and when does one sell a call option?

    The incorporation of options into all types of investment strategies has quickly grown in popularity among individual investors. ... Read Full Answer >>
  6. How is a put option exercised?

    A put option is a contract that gives the option holder the right, but not obligation, to sell a set amount of shares (1 ... Read Full Answer >>
Related Articles
  1. Trading Strategies

    How to Use Trailing Stops

    A trailing stop is an order to buy or sell a security if it moves in an unfavorable direction.
  2. Investing

    Stop Limit Orders

    A stop limit is an order to sell or buy a stock once it reaches a certain level, but only if the shareholder can obtain a specified price.
  3. Investing Basics

    Stop Loss Order Strategy

    A stop loss order is an order placed with a broker to sell a stock immediately if it drops to a certain price. It's a common way for investors to protect themselves from the possibility of a ...
  4. Options & Futures

    Introduction To Put Writing

    Learn about a strategy that may be appropriate if you have a positive outlook on a stock.
  5. Options & Futures

    How To Avoid Closing Options Below Intrinsic Value

    To get the best return possible on your options trading, it is important to understand how options work and the markets in which they trade.
  6. Trading Strategies

    The Stop Loss Order

    A stop loss order can protect an investor's portfolio when it is left unattended. Find out more about this market order and how it can work for you.
  7. Options & Futures

    Using LEAPS With Collars

    This options strategy will help you lock in profit while keeping your upside potential.
  8. Professionals

    Tips For Series 7 Options Questions

    We'll show you how to ace the largest and most difficult section of this exam.
  9. Trading Strategies

    What's The Difference Between A Stop And A Limit Order?

    Find out what separates these two market orders and what they can do for you.
  10. Options & Futures

    Put Option Basics

    Put option allow investors to hedge an investment they own or speculate in an investment they don't own. Find out more about this type of option and how it can work in an investor's favor.

You May Also Like

Hot Definitions
  1. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  2. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
  3. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through ...
  4. Security Market Line - SML

    A line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky ...
  5. Tangible Net Worth

    A measure of the physical worth of a company, which does not include any value derived from intangible assets such as copyrights, ...
  6. Marginal Utility

    The additional satisfaction a consumer gains from consuming one more unit of a good or service. Marginal utility is an important ...
Trading Center