Put
A put option, commonly referred to as a “put,” is a financial contract in options trading that gives the holder the right, but not the obligation, to sell a specified amount of an underlying asset, such as stocks or futures, at a predetermined price (the strike price) within a set period of time.[1] Puts are widely used by traders and investors for hedging, speculation, and income generation.
Overview[edit]
The buyer of a put option pays a premium for the right to sell the underlying asset at the strike price before the option’s expiration date. Conversely, the seller (writer) of a put option is obligated to buy the asset at the strike price if the option is exercised. Put options are typically used when the investor expects the price of the underlying asset to decline.[2]
Trading Strategies Involving Puts[edit]
Traders utilize put options in a variety of strategies, each serving different risk profiles and market outlooks. Common strategies involving puts include:
- Protective Put: Buying a put on an asset already owned to hedge against a potential decline in price.How Options Can Help Protect Your Stocks. Charles Schwab.
- Long Put: Purchasing a put to profit from a fall in the value of the underlying asset.
- Naked Put (Short Put): Selling a put without holding the underlying asset, seeking to earn the premium, but exposing the seller to potential obligation to purchase the asset if exercised.
- Cash-Secured Put: Selling a put while maintaining enough cash to buy the underlying asset if the option is exercised.
- Bear Put Spread: Buying and selling puts with different strike prices to profit from moderate declines while limiting both risk and reward.
- Put Ratio Spread: Selling more puts than are bought, benefiting from a slight decrease or stability in price, but carrying downside risk.
- Collar: Holding the underlying, buying a protective put, and selling a covered call to limit both upside and downside.
Video[edit]
Equity Options[edit]
Futures Options[edit]
Market Usage and Risk Considerations[edit]
Put options are widely used for hedging portfolios, providing insurance against downward moves in asset prices. They are also used for speculation by traders seeking to profit from bearish movements. However, put options can become worthless if the underlying asset’s price does not fall below the strike price before expiration, resulting in the loss of the premium paid.[3] Conversely, selling puts involves the risk of having to purchase the underlying asset at the strike price, which can result in losses if the asset’s value falls significantly.
References[edit]
- ↑ An Introduction to Put Options. Cboe Global Markets.
- ↑ Put Option Definition. Nasdaq.
- ↑ Options 101: How Put Options Work. Investor’s Business Daily.