Definition
In finance, a put or put option is a stock market device which gives the owner of a put the right, but not the obligation, to sell an asset, at a specified price, by a predetermined date to a given party. The purchase of a put option is interpreted as a negative sentiment about the future value of the underlying stock. The term “put” comes from the fact that the owner has the right to “put up for sale” the stock or index.
Put Option
A put option contract gives the right, but not the obligation, to the owner to sell a specified amount of underlying security within a specified period of time, at a specified price to a given party. Opposite of call option, it is related to selling the shares rather than the right to buy them.
More about Put Option
What are the scenarios in which put option becomes valuable? If the price of an underlying stock is depreciating comparative to the strike price, put option becomes more valuable. Purchasing a put option is taken as a negative sign about the future value of the asset. These put options are mostly used in the stock market to help protect the shares if the prices of the underlying asset fall below a specified price.
If such a situation arises, the owner of put option is not obligated but has the right to sell these underlying assets at the specified price of the put option. This way the buyer will be able to get the specified strike price even if the asset is not currently worth any money. The buyer either wants to protect a long position in the underlying asset or believes that the price of the underlying asset will fall by the date put option will be applicable.
There are different specifications, models and rights when it comes to exercising the phenomenon of put option. The right to sell is dependent on the option style. If you are following a European put option, the holder is entitled to exercise the put option for a small period of time close to the point when the asset is reaching expiration. Alternatively, in case of an American put option, you can exercise the right to sell the underlying asset any point of time before the asset reaches its expiration.
Further Reading
- Motivations for bank mergers and acquisitions: Enhancing the deposit insurance put option versus earnings diversification – www.jstor.org [PDF]
- The British put option – www.tandfonline.com [PDF]
- Real option methods for improving economic risk management in infrastructure project finance. – elibrary.ru [PDF]
- Value of a put option to the risk-averse newsvendor – www.tandfonline.com [PDF]
- The value of an option to exchange one asset for another – www.jstor.org [PDF]
- Valuing American put options using Gaussian quadrature – academic.oup.com [PDF]
- Pricing American put option on zero-coupon bond under fractional CIR model with transaction cost – www.tandfonline.com [PDF]
- Pricing the American put option: A detailed convergence analysis for binomial models – www.sciencedirect.com [PDF]
- Collar options to manage revenue risks in real toll public‐private partnership transportation projects – www.tandfonline.com [PDF]
