BROWSE

Put Option

Definition

In finance, a put or put option is a stock market device which gives the owner of a put the right, but not the obligation, to sell an asset, at a specified price, by a predetermined date to a given party. The purchase of a put option is interpreted as a negative sentiment about the future value of the underlying stock. The term "put" comes from the fact that the owner has the right to "put up for sale" the stock or index.

A put option contract gives the right, but not the obligation, to the owner to sell a specified amount of underlying security within a specified period of time, at a specified price to a given party. Opposite of call option, it is related to selling the shares rather than the right to buy them.

More about Put Option

What are the scenarios in which put option becomes valuable? If the price of an underlying stock is depreciating comparative to the strike price, put option becomes more valuable. Purchasing a put option is taken as a negative sign about the future value of the asset. These put options are mostly used in the stock market to help protect the shares if the prices of the underlying asset fall below a specified price.

If such a situation arises, the owner of put option is not obligated but has the right to sell these underlying assets at the specified price of the put option. This way the buyer will be able to get the specified strike price even if the asset is not currently worth any money. The buyer either wants to protect a long position in the underlying asset or believes that the price of the underlying asset will fall by the date put option will be applicable.

There are different specifications, models and rights when it comes to exercising the phenomenon of put option. The right to sell is dependent on the option style. If you are following a European put option, the holder is entitled to exercise the put option for a small period of time close to the point when the asset is reaching expiration. Alternatively, in case of an American put option, you can exercise the right to sell the underlying asset any point of time before the asset reaches its expiration.


Further Reading


Motivations for bank mergers and acquisitions: Enhancing the deposit insurance put option versus earnings diversification
www.jstor.org [PDF]
… Contrary to the predictions of the deposit insurance put- option hypothesis, the coefficient on the variance of the target's … Eastern Economic Journal 15 … Salomon Brothers Center for the Study of Financial Institutions Monograph Series in Finance and Economics, Monograph 1987 …

The British put optionThe British put option
www.tandfonline.com [PDF]
… Contrary to the predictions of the deposit insurance put- option hypothesis, the coefficient on the variance of the target's … Eastern Economic Journal 15 … Salomon Brothers Center for the Study of Financial Institutions Monograph Series in Finance and Economics, Monograph 1987 …

Real option methods for improving economic risk management in infrastructure project finance.Real option methods for improving economic risk management in infrastructure project finance.
elibrary.ru [PDF]
… Contrary to the predictions of the deposit insurance put- option hypothesis, the coefficient on the variance of the target's … Eastern Economic Journal 15 … Salomon Brothers Center for the Study of Financial Institutions Monograph Series in Finance and Economics, Monograph 1987 …

Value of a put option to the risk-averse newsvendorValue of a put option to the risk-averse newsvendor
www.tandfonline.com [PDF]
… Contrary to the predictions of the deposit insurance put- option hypothesis, the coefficient on the variance of the target's … Eastern Economic Journal 15 … Salomon Brothers Center for the Study of Financial Institutions Monograph Series in Finance and Economics, Monograph 1987 …

The value of an option to exchange one asset for anotherThe value of an option to exchange one asset for another
www.jstor.org [PDF]
… Contrary to the predictions of the deposit insurance put- option hypothesis, the coefficient on the variance of the target's … Eastern Economic Journal 15 … Salomon Brothers Center for the Study of Financial Institutions Monograph Series in Finance and Economics, Monograph 1987 …

Valuing American put options using Gaussian quadratureValuing American put options using Gaussian quadrature
academic.oup.com [PDF]
… Contrary to the predictions of the deposit insurance put- option hypothesis, the coefficient on the variance of the target's … Eastern Economic Journal 15 … Salomon Brothers Center for the Study of Financial Institutions Monograph Series in Finance and Economics, Monograph 1987 …

Pricing American put option on zero-coupon bond under fractional CIR model with transaction costPricing American put option on zero-coupon bond under fractional CIR model with transaction cost
www.tandfonline.com [PDF]
… Contrary to the predictions of the deposit insurance put- option hypothesis, the coefficient on the variance of the target's … Eastern Economic Journal 15 … Salomon Brothers Center for the Study of Financial Institutions Monograph Series in Finance and Economics, Monograph 1987 …

Pricing the American put option: A detailed convergence analysis for binomial modelsPricing the American put option: A detailed convergence analysis for binomial models
www.sciencedirect.com [PDF]
… Contrary to the predictions of the deposit insurance put- option hypothesis, the coefficient on the variance of the target's … Eastern Economic Journal 15 … Salomon Brothers Center for the Study of Financial Institutions Monograph Series in Finance and Economics, Monograph 1987 …

Collar options to manage revenue risks in real toll public‐private partnership transportation projectsCollar options to manage revenue risks in real toll public‐private partnership transportation projects
www.tandfonline.com [PDF]
… Contrary to the predictions of the deposit insurance put- option hypothesis, the coefficient on the variance of the target's … Eastern Economic Journal 15 … Salomon Brothers Center for the Study of Financial Institutions Monograph Series in Finance and Economics, Monograph 1987 …



Q&A About Put Option


What does "" in the second sentence mean?

In finance, over-the-counter (OTC) refers to transactions that occur directly between two parties without going through a formal exchange.

What does "" in the first sentence mean?

In finance, over-the-counter (OTC) refers to transactions that occur directly between two parties without going through a formal exchange.

How is purchasing a put option considered as negative sign about the future value of an asset?

Purchasing the put option shows that you believe that the price will fall below its strike price and therefore want protection from this loss. This is seen as negative sign because if prices were going up then why would someone purchase insurance against them falling by buying puts

Are there different types of put options?

Yes, there are different types.

What is a put option?

A put option contract gives the right, but not the obligation, to sell a specified amount of underlying security within a specified period of time at a specified price to a given party.

How do options differ from other financial instruments?

Options are contracts while other financial instruments are not.

How do you acquire an option?

You acquire an option by purchase or compensation.

What does an American style put option allow you to do?

An American style allows you to exercise your right at any point in time before expiration.

What is an option?

An option is a contract that allows the owner to buy or sell an underlying asset.

What does a European style put option allow you to do?

A European style puts limits on when you can exercise your right. You can only exercise it for up until expiration date or close to it.

Leave a Reply

Your email address will not be published. Required fields are marked *