UK Accounting Glossary
In options trading, a put is a right, but not the obligation, to sell the underlying security at a specified strike before it expires and becomes worthless. A put is the opposite of a call, and is a bet that the underlying security will decrease in value. If the stock drops below the strike price, the put is in-the-money. A put is out-of-the-money when the value of the underlying security is higher than that of the strike price.
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. Further, if the buyer does not exercise the put option, the put option is said to expire worthless and the buyer of that put option would lose the entire premium of $200. The above example does not take into account the commissions required to execute the put option.
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This glossary post was last updated: 6th February 2020.