trading

put option

An options contract giving the buyer the right to sell a security at a specified strike price before the expiration date. Buyers profit when the stock falls below the strike price.

Example

“He bought put options as insurance on his portfolio — when stocks crashed, his puts gained value and offset losses.”

Memory Tip

PUT option = you PUT (force) the right to SELL. Profit when prices fall.

Why It Matters

Put options allow investors to protect their stock portfolios against price declines by locking in a minimum selling price. This hedging strategy is crucial for risk management, especially during uncertain market conditions when you want to limit potential losses while maintaining upside potential.

Common Misconception

Many people mistakenly believe that buying a put option guarantees you will make money if a stock falls. In reality, you must account for the premium paid upfront to buy the option, so the stock needs to drop below the strike price minus the premium for you to actually profit.

In Practice

Suppose you own 100 shares of a company trading at $50 per share and buy a put option with a $45 strike price for a $2 premium per share. If the stock drops to $40, you can exercise your option to sell at $45, limiting your loss to $5 per share plus the $2 premium paid, rather than losing $10 per share on the open market.

Etymology

PUT = the buyer PUTS the shares to the seller by exercising the right to sell.

Common Misspellings

put-optionput optinput optoin

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