Put option

A put option (including a put option or Vanilla Put) is one of two basic variants of an option. The holder of a put option has the right but not the obligation, within a specified period ( American options ) or at a specific time ( European options ) a fixed quantity of a specific underlying asset at a predetermined price (exercise price ) for sale.

Due to this construction, the price of a put option increases tend to be when the price of the underlying falls; conversely, usually falls in the price of the put option, if the price of the underlying rises.

The second basic variant of options is the option to buy.

Operation

The seller of the put option is obligated to purchase the underlying asset. For this obligation he receives the premium from the buyer of the option. The buyer of a put option will only exercise its right, if the price of the underlying is below the exercise price.

In practice, however, the base value is not necessarily delivered upon exercise of the option. If necessary. the seller of the put option pays the buyer simply the difference between the exercise price and the price of the underlying has to be made ​​at the time - this practice is known as cash settlement. Whether exercise takes place a cash settlement or whether the underlying is delivered, is set in the contract.

The price of a put option (long ) corresponds to the insurance premium an investor. A premature exercise of the option is mostly due to the rest of the time value of no benefit.

While pursuing one would obtain only the intrinsic value, when selling the intrinsic value plus the time value. In practice, exerting still be useful if no price is offered for the option from either the market, or if the bid-ask spread is too large.

The maximum profit that the buyer of a put option can achieve, as opposed to a call is not infinite, but limited to the carrying value less the option premium paid by them (and then, if the Underlying is equal to zero ).

The maximum loss of the seller is a mirror image of the exercise price less the premium received. Its maximum possible gain is the premium.

A hedging transaction as an example:

A grain farmer plans to sell a certain amount of grain for future harvest. He wants to assure, however, that until then decreases the price of corn. So he buys a put option on this amount of grain. If by harvest time the price of the underlying asset actually fall below the strike price, then the seller of the option must replace him this fall in prices. The grain farmer has hedged itself by paying an option premium, against a price of grain case.

Such transactions can be concluded between any two parties, without any own personal connection with the underlying grain here.

Strategies with Puts

• Straddle
• Protective Put
• Butterfly
• Bull spread, bear spread