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Concept
Put option
Summary
In finance, a put or put option is a derivative instrument in financial markets that gives the holder (i.e. the purchaser of the put option) the right to sell an asset (the underlying), at a specified price (the strike), by (or on) a specified date (the expiry or maturity) to the writer (i.e. seller) of the put. 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.
Puts may also be combined with other derivatives as part of more complex investment strategies, and in particular, may be useful for hedging. Holding a European put option is equivalent to holding the corresponding call option and selling an appropriate forward contract. This equivalence is called "put-call parity".
Put options are most commonly used in the stock market to protect against a fall in the price of a stock below a specified price. If the price of the stock declines below the strike price, the holder of the put has the right, but not the obligation, to sell the asset at the strike price, while the seller of the put has the obligation to purchase the asset at the strike price if the owner uses the right to do so (the holder is said to exercise the option). In this way the buyer of the put will receive at least the strike price specified, even if the asset is currently worthless.
If the strike is K, and at time t the value of the underlying is S(t), then in an American option the buyer can exercise the put for a payout of K−S(t) any time until the option's maturity date T. The put yields a positive return only if the underlying price falls below the strike when the option is exercised. A European option can only be exercised at time T rather than at any time until T, and a Bermudan option can be exercised only on specific dates listed in the terms of the contract. If the option is not exercised by maturity, it expires worthless.
Official source
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