What is a Put Option?
A put option is a financial contract between the buyer and seller of a securities option allowing the buyer to force the seller (or the writer of the option contract) to buy the security.
How does a Put Option work?
In options trading, a buyer may purchase a short position (i.e. the expectation that the price underlying security at an agreed-upon price (i.e. the strike price) by a certain date. If the market price falls below the strike price, as expected, the buyer can decide to exercise his or her right to sell at that price and the writer of the contract has the obligation to buy the security at the strike price. With the exercise of the put, the trader makes the difference between the cost of the security in the (i.e. a lower price than the strike price) and the sale of the to the put writer (i.e. at the strike price).go down) on a security. This position gives the buyer the right to sell the
For example, if a trader purchases a put shares at $10 before the end of the period. If Company XYZ's share price drops to $8 per share, the trader can buy the shares on the open and sell the put at $10 per share (the strike price on the put contract). Taking into account the put contract price of $.01/share, the trader earn a profit of $1.99 per share.contract for Company XYZ for $1 (i.e. $01/share for a 100 share contract) with a strike price of $10 per share, the trader can sell the
Why do Put Options matter?
Investors hedge against the decline in the share price. and calls are the key types of options trading.often purchase a on they already own to act as a