A put option is a financial contract that gives its owner the right, but not the obligation, to sell a specific underlying asset-such as a stock-at a predetermined price called the strike price, within a set time period or by a specific expiration date. This means the owner can sell the asset at the strike price even if the market price falls below it
. Key points about put options:
- The buyer of a put option expects or hopes the price of the underlying asset will decrease, allowing them to sell at the higher strike price and potentially profit from the difference
- The seller (writer) of the put option has the obligation to buy the asset at the strike price if the buyer exercises the option
- Put options are commonly used for hedging to protect against a decline in the price of an asset or for speculative purposes to profit from a price drop
- If the market price is above the strike price at expiration, the put option typically expires worthless, and the buyer loses only the premium paid for the option
- Put options are derivatives, meaning their value is derived from the price of the underlying asset
In summary, a put option is a tool that allows investors to sell an asset at a fixed price before a deadline, providing a way to manage risk or speculate on price declines.
