Put

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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

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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.

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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 >>

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