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Put Option

Definition

Options derive ( hence they are sometimes called a derivative ) they value from an underlying instrument such as a stock or bond. You can buy or sell options to make additional income through earning a premium or you can speculate on movements on values of the underlying. A put option gives the owner a right, but not an obligation, to sell a specified amount of an underlying security, typically 100 shares of stock, at a set price until expiration of the option contract. You should consider buying puts when you have a view that the price of the underlying asset will drop below the exercise price before the expiration date.

Using the term Put Option :

To protect his portfolio from a large market correction in the future, Igor the Investor buys a basket of put options that are out of the money (meaning that they are above the exercise price so they cost less). If or when the market suffers a big decline, Igor will be happy because his put options will go up in value and offset his losses. This is a form of portfolio insurance.

Pay Special Attention To :

Although it seems like a great idea to hold put options at all times on your portfolio, it is actually quite costly in the long run. Options are priced rather efficiently and it is generally a professional's game so try to ensure you know what you are doing before venturing into the world of options or work with an experienced professional.

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Related terms

Derivative , Options

'Put Option' appears in the definitions of these other terms:

Call Option