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Published On: Mon, Feb 18th, 2013

Put Option

A Put Option or Put is a derivatives contract that gives the buyer and holder of the contract the right, but not the obligation to sell an underlying stock, index, or future at a pre-set price at a pre-set time in the future.

Put Options are purchased by traders that think that the price of the underlying asset they are tied to will fall to a lower price than the set exercise price of the option.  For example, if a trader thinks that XYZ stock will be at or below 25GBP in one month in the future, he will enter into and buy a XYZ Put Option with a one month expiration date and an exercise price of 25GBP.  He will make money on this trade when XYZ stock falls below 25GBP.  At this time, he can buy shares of XYZ at less than 25GBP in the open market, yet he has the right to sell them at 25GBP.  The trader will pocket the difference of the exercise price and the price of the shares in the open market.  This is a trading strategy for when it is thought the underlying will fall in value below the exercise price before the expiration date.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.

 

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