Updated Dec 23, What Is a Put?
A put is an options contract that gives the owner the right, but not the obligation, to sell a certain amount of the underlying asset, at a set price within a specific time. The buyer what is such a put option a put option believes that the underlying stock will drop below the exercise price before the expiration date.
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The exercise price is the price that the underlying asset must reach for the put option contract to hold value. Key Takeaways A put gives the owner the right, but not the obligation, to sell the underlying stock at a set price within a specified time. A put option's value goes up as the underlying stock price depreciates; the put option's value goes down as the underlying stock appreciates.
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When an investor purchases a put, she expects the underlying stock to decline in price. The Basics of Put Options Puts are traded on various underlying assets, which can include stocks, currencies, commodities, and indexes. The buyer of a put option may sell, or exercisethe underlying asset at a specified strike price.
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Put options are traded on various underlying assets, including stocks, currencies, bonds, commodities, futures, and indexes. The value of a put option appreciates as the price of the underlying stock depreciates relative to the strike price. On the flip side, the value of a put option decreases as the underlying stock increases.
Conversely, a put option loses its value as the underlying stock increases. Because put options, when exercised, provide a short position in the underlying asset, they are used for hedging purposes or to speculate on downside price action.
This strategy is used as a form of investment insurance to ensure that losses in the underlying asset do not exceed a certain amount, namely the strike price.
In general, the value of a put option decreases as its time to expiration approaches due to time decay because the probability of the stock falling below the specified strike price decreases. Calls Derivatives are financial instruments that derive value from price movements in their underlying assets, which can be a commodity such as gold or stock.
What is a put option?
Derivatives are largely used as insurance products to hedge against the risk that a particular event may occur. The two main types of derivatives used for stocks are put and call options. A call option gives the holder the right, but not the obligation, to buy a stock at a certain price in the future.
When an investor buys a call, she expects the value of the underlying asset to go up. A put option gives the holder the right, but not the obligation, to sell a stock at a certain price in the future.
When an investor purchases a put, she expects the underlying asset to decline in price; she may sell the option and gain a profit. An investor can also write a put option for another investor to buy, in which case, she would not expect the stock's price to drop below the exercise price.
Each option contract covers shares. As another way of working a put option as a hedge, if the investor in the previous example already owns shares of ABC company, that position would be called a married put and could serve as a hedge against a decline in the share price.
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