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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
Putting things into perspective: How to hedge, using puts. How to speculate, using puts. 1.
An option that conveys to its holder the right, but not the obligation, to sell a specific asset at a predetermined price until a certain date. In most cases, puts have 100 shares of stock as the underlying asset. For example, an investor may purchase a put option on GenCorp common stock that confers the right to sell 100 shares at $15 per share until September 21. Puts are sold for a fee by other investors who incur an obligation to purchase the asset if the option holder decides to sell. Investors purchase puts in order to take advantage of a decline in the price of the asset. Also called put option
. Compare call
. See also guarantee letter
, synthetic put
, transferable put right
2. Sale of an issue of bonds before maturity by forcing the issuer to buy at par. Few bond issues permit the holder this option.
A put option has an inverse relationship to the underlying security. As the value of the stock increases, the value of the put decreases. Like calls, puts can be used for both hedging and speculation. Puts can be purchased in conjunction with stock ownership as a form of insurance (that is, a hedge) against downside loss on a stock. If the stock price declines, the put holder can either sell the put and keep the stock, or exercise the put and sell the stock at the put's strike price. In either case, the increased value of the option will offset the stock loss to some degree. If the stock price rises beyond a certain level, the put will expire worthless. In this case, the put holder will lose the premium paid for the option but will still participate in the upward stock movement. The break-even point occurs when the stock price advances beyond the put's strike price plus the premium. Puts also can be used speculatively without a position in the underlying security. Instead of selling a stock short, an investor who anticipates a decline in the price of a stock can buy an at-the-money put. If the stock price rises, causing the put to expire worthless, the maximum loss is the premium paid for the put. But if the stock price declines substantially, the investor could make profits that far exceed the initial cost of the put.Henry Nothnagel, Senior Vice President—Options, Wachovia Securities, Inc., Chicago, IL
To force the seller of a put option to purchase shares of stock at the stipulated price. Puts are exercised by the owner only when the market price of the underlying stock is less than the strike price. Also called put to seller.