What Is a Put Option?

What Is a Put Option?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

A put option is a contract in the stock market that gives you, as the buyer, the right (but not the obligation) to sell a specific amount of shares in a stock, bond, or commodity, at a predetermined price (known as the strike price), within a specific period. This period typically ranges anywhere from one day to several months. The main aim of purchasing a put option is to take advantage of a potential decrease in the price of the security or to hedge against possible losses.

Related Questions

1. How is a put option different from a call option?

While a put option gives you the right to sell a security at a predetermined price, a call option gives you the right to buy a security at a specific price within a predetermined timeframe.

2. What does it mean to exercise a put option?

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Exercising a put option means that you’re acting upon your right to sell the specified amount of the underlying security at the agreed-upon strike price.

3. What happens if my put option expires out of the money?

If your put option expires out of the money, which means the stock price is above the strike price, the option becomes worthless and the investor loses the money spent on the option premium.

4. What factors determine the price of a put option?

Several factors can affect the price of a put option. Some major factors include the price difference between the strike and market prices, the time remaining until expiration, the volatility of the underlying security, and the risk-free rate of return.

5. How can put options hedge against risk?

Put options are used in hedging as an insurance policy. By having the right to sell your stocks at a set price, you protect yourself against potential major losses. If the stock price falls, the value of your put option rises, helping to offset any losses.