What Is A Put Option?
by Takara Alexis
A put option is a written contract between a seller and a buyer that gives the option buyer the right to sell an asset at a certain price within a certain period of time. The buyer doesn't have to sell the stock during that time frame, but has the option to do so. The option seller is obligated to purchase the stock if the option holder exercises his options.
The put option contract involves certain details. The strike price is the price at which the option can be sold. The option premium is the price the buyer pays for the option. The expiration date is the date by which the option must be used or it will become void. When the put option expires, the option purchaser can no longer sell the option at the strike price. Though the strike price is quoted per share, put options are sold in contracts that represent 100 shares of stock each.
The put option buyer has the advantage of selling a stock for a higher price even though the price of the stock has dropped as long as the option is exercised before the expiration date. Since the value of a put option increases as the value of the stock falls, you would purchase a put option when you believe a stock's value will fall.
The seller of put options only earns money when the buyer does not exercise the option prior to it expiring. So, you'd sell a put option when you assume the stock cost will either go up or remain the same. In that case, you'd never have to buy the stock from the option buyer. Instead, you would keep the option premiums as profit.
You can rapidly calculate whether the option is in-the-money or out-of-the-money by comparing the general market financial worth of the stock from the strike cost. When the price of the stock drops below the strike price, the put option is in-the-money.
On the other hand, the option is out-of the-money when the stock price rises over the strike cost.
