Put option

Lore & Background

The term 'put' comes from the owner's right to 'put up for sale' the stock or index. A put option can be combined with other derivatives for complex strategies, and holding a European put is equivalent to holding a call and selling a forward contract, an equivalence called put-call parity. The most obvious use is as insurance, such as in the protective put strategy, where an investor buys enough puts to cover holdings of the underlying.

Reader's Guide

Put options are significant in financial markets because they allow investors to limit downside risk or speculate on price declines. The buyer's risk is limited to the premium paid, unlike short selling where risk is unlimited. The writer's potential loss can be substantial, up to the strike price if the underlying falls to zero. Put options are widely traded on stocks, interest rates, and commodities, and their pricing depends on factors like time to expiry, volatility, and interest rates. They are a central tool for hedging and portfolio management.

Did You Know?

• The purchase of a put option is interpreted as a negative sentiment about the future value of the underlying stock.
• A European put option can only be exercised at maturity, while an American put can be exercised any time before expiration.
• The put writer's total potential loss is limited to the strike price less the spot price and premium received.
• If the underlying stock's price falls to zero, the put writer's loss equals the strike price minus the premium received.