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The exercise price of the shares is $10, and the current ABC share price is $12. This put option contract has given the investor the right, but not the obligation, to sell 100 shares of ABC at $10. A call option is “in the money” if the market price of the underlying stock rises above the strike price, as exercising the option would allow someone to purchase the stock at a below-market price. Conversely, it’s “out of the money” (worthless) when the market price of the underlying stock is below the strike price.

What if the investor did not own the SPY units, and the put option was purchased purely as a speculative trade? In this case, exercising the put option would result in a short sale of 100 SPY units at the $425 strike price. The investor could then buy back the 100 SPY units at the current market price of $415 to close out the short position. Time value, or extrinsic value, is reflected in the premium of the option.

What Is the Downside of Buying a Put?

1. Time decay accelerates as an option’s time to expiration draws closer since there’s less time to realize a profit from the trade.
2. How a put option works can be better illustrated with the help of an example.
3. They are happy to buy the stock at the current price because they believe it will rise again in the future.
4. Contrary to a long put option, a short or written put option obligates an investor to take delivery, or purchase shares, of the underlying stock at the strike price specified in the option contract.

With these 4 variants, a trader can create numerous different combinations and venture into some really efficient strategies, generally referred to as ‘Option Strategies’. Imagination and intellect is the only requirement for creating these option trades. Hence before put meaning in share market we get deeper into options, it is important to have a strong foundation on these four variants of options.

Sellers expect the stock to stay flat or rise above the strike price, making the put worthless. A put option gives you the right, but not the obligation, to sell a stock at a specific price (known as the strike price) by a specific time — at the option’s expiration. For this right, the put buyer pays the seller a sum of money called a premium. Unlike stocks, which can exist indefinitely, an option ceases to exist at expiration and then is settled, with some value remaining or with the option expiring completely worthless. The put buyer/owner is short on the underlying asset of the put, but long on the put option itself.

When we do so, I’m certain you will see the calls and puts in a new light and perhaps develop a vision to trade options professionally. Important note – The calculation of the intrinsic value, P&L, and Breakeven point is all with respect to the expiry. So far in this module, we have assumed that you as an option buyer or seller would set up the option trade with an intention to hold the same till expiry. Before we proceed to generalize the behaviour of the Put Option P&L, we need to understand the calculation of the intrinsic value of a Put option. We discussed the concept of intrinsic value in the previous chapter; hence I will assume you know the concept behind IV.

Find out more about trading options

Short selling is therefore considered to be much riskier than buying puts. Out of the money (OTM) and at the money (ATM) put options have no intrinsic value because there is no benefit in exercising the option. Investors have the option of short-selling the stock at the current higher market price, rather than exercising an out-of-the-money put option at an undesirable strike price. However, outside of a bear market, short selling is typically riskier than buying put options. Call and put options are two primary financial derivatives traded in the stock market.

No investor or trader purchases and takes ownership of a “pork belly.” I hope by now you are through with the practicalities of a Call option from both the buyers and sellers perspective. If you are indeed familiar with the call option then orienting yourself to understand ‘Put Options’ is fairly easy. The only change in a put option (from the buyer’s perspective) is the view on markets should be bearish as opposed to the bullish view of a call option buyer. Here’s a graph of the buyer’s profit when the option expires assuming various stock prices.

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In the process, we can even make a few generalizations about the behaviour of a Put option’s P&L. When you write an option, you’re the person on the other end of the transaction. Investments in the securities market are subject to market risk, read all related documents carefully before investing. Trusted by 50 million+ customers in India, Bajaj Finserv App is a one-stop solution for all your financial needs and goals.

Put sellers stay in business by writing a lot of puts on stocks they think will rise in value. They hope the fees they collect will offset the occasional loss they incur when stock prices fall. Puts give the buyer the right, but not the obligation, to sell the underlying asset at the strike price specified in the contract. The writer (seller) of the put option is obligated to buy the asset if the put buyer exercises their option. Investors buy puts when they believe the price of the underlying asset will decrease and sell puts if they believe it will increase.

The details mentioned in the respective product/ service document shall prevail in case of any inconsistency with respect to the information referring to BFL products and services on this page. A put can be contrasted with a call option, which gives the holder the right to buy the underlying asset at a specified price on or before expiration. Many brokers restrict option trading to experienced investors, by way of a test, minimum balance requirements, or both. Investors don’t have to own the underlying stock to buy or sell a put. NerdWallet, Inc. is an independent publisher and comparison service, not an investment advisor.

However by no means I am suggesting that you need not hold until expiry, in fact I do hold options till expiry in certain cases. Generally, speaking option sellers tend to hold contracts till expiry rather than option buyers. This is because if you have written an option for Rs.8/- you will enjoy the full premium received, i.e. Put options are “in the money” when the stock price is below the strike price at expiration.

Options

1. Likewise the premium of the option depends on certain forces called as the ‘Option Greeks’.
2. The position is called ‘Long Option’ only if you are creating a fresh buy position.
3. So if the Put option buyer expects the market to go down by expiry, then the put option seller would expect the market (or the stock) to go up or stay flat.
4. American-style options allow the put holder to exercise the option at any point up to the expiration date.
5. XYZ becomes worthless, but you have to buy 100 shares at the strike price anyway.

For example, if the stock fell from $40 to $20, a put seller would have a net loss of $1,700, or the $2,000 value of the option minus the $300 premium received. If the option is exercised on you, you’ll be forced to buy 100 shares of the stock at $40 per share, while the stock is trading in the market at $20 per share. You’ll incur an immediate $20 per share loss on the stock, though of course, that’s offset by the $300 you received for selling the put option. If you’re looking to trade options, you can sell them as well as buy them. The payoff for put sellers is exactly the reverse of those for buyers.