Put Option

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Definition: Put Option


Put Option

Quick Summary of Put Option


Put option is the right but not the obligation to sell an underlying at a particular price (strike price) on or before the expiration date of the contract. Alternatively, a short forward position with an upside insurance policy.




What is the dictionary definition of Put Option?

Dictionary Definition


put is an options contract that gives the holder the right, but not the obligation, to sell the underlying asset at a specified price on or before a specified date.


Full Definition of Put Option


In options trading, a put option is a bet that the value of its underlying security will fall. A buyer pays a premium to a writer (i.e. seller) for the right, but not the obligation, to sell the underlying security to the writer at any time on or before the expiration date, at price predetermined a strike (for an American-style option). If the value of the underlying security falls below the strike price, the put option is said to be in-the-money.

For example, an investor who wants to purchase a put option on XYZ, Inc. when its stock is trading at $42 in August might buy a September 40 put option for 100 shares. Assume the trader purchases the put option for $2 — the premium of the put option would be $2 X 100 shares or $200. If XYZ’s stock price falls to $35, the put option would be in-the-money for $5 ($40 minus $35) and the trader could sell his 100 shares of XYZ for $40, netting $500 from that transaction. However, the overall profit of the transaction would be $300 ($500 minus the $200 premium). On the downside, XYZ would need to drop to at least $38 for the put option to break-even. The above example does not take into account the commissions required to execute the put option.

A put option is out-of-the-money if the value of the underlying security is higher than the strike price. If the buyer does not exercise the put option, the put option is said to expire worthless. In the XYZ, Inc. put option example above, if the stock does not trade below the strike price of $40, the investor would not exercise the put option. As a result, the put option would expire worthless and the buyer of that put option would lose the entire premium of $200.

There are two people for each contract. For a put, the buyer wants to sell the 100 shares for each contract bought (option contracts are almost always in blocks of 100 shares) at the strike price. The buyer would exercise the put, sell the shares (going short the shares), then buy them back at the lower price, pocketing the difference. In this instance, the buyer does not end up owning the shares at the end. The seller is paid the premium, which he or she keeps regardless of what happens subsequently. The seller is betting (literally) that the share price will be above the strike price by the expiry, at which point the profit is the premium received. If it is, he or she won’t have to buy the shares because the buyer could just sell those shares at the higher price.

The owner of the put option is said to be “long” the put.

The buyer is betting that the stock price will go down before the expiry date, while the seller is either betting that it will not or is content to buy the shares at the strike price.


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Definition Sources


Definitions for Put Option are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 6th August, 2021 | 0 Views.