put option

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Put option

This security gives investors the right to sell (or put) a fixed number of shares at a fixed price within a given period. An investor, for example, might wish to have the right to sell shares of a stock at a certain price by a certain time in order to protect, or hedge, an existing investment.

Put Option

An option contract in which the holder has the right but not the obligation to sell some underlying asset at an agreed-upon price on or before the expiration date of the contract, regardless of the prevailing market price of the underlying asset. One buys a put option if one believes the price for the underlying asset will fall by the end of the contract. If the price does fall, the holder may buy and resell the underlying asset for a profit. If the price does not fall, the option expires and the holder's loss is limited to the price of buying the contract. Put options may be used on their own or in conjunction with call options to create an option spread in order to hedge risk.

put option

See put.

Put option.

Buying a put option gives you the right to sell the specific financial instrument underlying the option at a specific price, called the exercise or strike price, to the writer, or seller, of the option before the option expires.

You pay the seller a premium for the option, and if you exercise your right to sell, the seller must buy.

Selling a put option means you collect a premium at the time of sale. But you must buy the option's underlying instrument if the option buyer exercises the option and you are assigned to meet the contract's terms.

Not surprisingly, buyers and sellers have different goals. Buyers hope that the price of the underlying instrument drops so they can sell at the exercise price, which is higher than the market price. This way, they could offset the price of the premium, and hopefully make a profit as well.

Sellers, on the other hand, hope that the price stays the same or increases, so they can keep the premium they've collected and not have to lay out money to buy.

put option


put option

References in periodicals archive ?
Putable convertibles fall into two broad categories: 1) zero coupon putable convertibles (about 36% of our sample) and 2) those paying a coupon (about 64% of our sample).
Putable convertibles came under intense scrutiny and attack in the financial press in late 2001 and 2002, after a number of companies (e.
The above debate among practitioners about the desirability of issuing putable convertibles raises several interesting questions.
Our primary goal is to identify the factors driving the issuance of putable convertibles.
We now briefly discuss the risk-shifting, asymmetric information, and tax savings rationales for the issuance of putable versus ordinary convertibles (we analyze these in detail in Section I).
The "asymmetric information" hypothesis postulates that putable convertibles are issued by firms with favorable private information (currently undervalued in the stock market), who assess a lower probability of their put option being exercised when compared to overvalued firms (whose insiders have less favorable private information about their firm value).
The tax savings hypothesis argues that putable convertible issuers may be partially motivated by their desire to save on income taxes (see Section I for details).
First, firms that issue putable convertibles are larger, less risky firms with smaller growth opportunities and a lower overall probability of bankruptcy as compared to those issuing ordinary convertibles.
Examples of this literature are Chatterjee and Yah (2008) who study contingent value rights (CVRs) in takeovers, Chemmanur, Nandy, and Yan (2003) who develop a theoretical and empirical analysis of mandatory convertibles, Hillion and Vermaelen (2004) who develop a theoretical and empirical analysis of "death spiral" convertibles, and Nanda and Yun (1996) who study "poison put" convertibles (see Footnote 6 for the distinction between putable and poison put convertibles).
Section III presents our empirical tests and results concerning three possible rationales for issuing putable convertibles.
7 billion in putable convertible notes late this year and two issuances of notes due in the first quarter of 2013 totaling approximately $750 million.
To limit liquidity risk, the funds seek to invest at least 30% of their portfolios in weekly liquid assets, which are typically VRDNs putable to a third party financial institution in seven days or less.