Investor Glossary-put optionInvestor Glossary-put optionInvestor Glossary-put optionInvestor Glossary-put optionInsightful stock market charts - Click here
investor
Categories    # A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Put Option

The HTML to link to this page
 

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.



Rate this put option definition...

Learn about investing with the Investor Glossary Term of the Day


Click here for insightful stock market charts. Where is the market headed? The answer may surprise you. Find out
with the exclusive & Barron's recommended charts of Chart of the Day.


Popular Terms: cancelled check, stock split, ex-dividend, class C shares, balance sheet, dividends payable, deferred tax, 401a, average price per share, stock market close, VIX, current ratio, open position, EBITDA, debt service coverage, irrevocable trust, risk management, required rate of return, retained earnings, inflation, covered put, FICO score, diluted share, APR, quality assurance, 144a, in escrow, wholly-owned subsidiary, ex-dividend date, reverse mortgage, labor relations, 1035 exchange, deferred revenue, Key Rate Duration, Zero Cost Collar, 1031 exchange, option premium, phantom income, LIBOR, command economy, limit order, FTSE, minority interest, margin rate, annual return, implied volatility, real GDP, liquidity ratio, per diem


Accounting | Banking | Bonds | Brokers | Economy | Futures | Mutual Funds | Options | Real Estate | Retirement | Stocks | Taxes | Technical Analysis
Investor Glossary | Term of the Day | Suggest a Term | Chart of the Day | Dogs of the Dow
©2004-2016 Investor Glossary - All rights reserved - Terms of Use