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| Put Option |
A put option gives the holder the right, but not the obligation, to sell a specified amount of an underlying asset to another party at a fixed price over a specific period of time (American option).
A European option can only be exercised at maturity, which makes it less valuable for an investor compared to an American option with the exact same parameters. the buyer of a put option estimates that the price of the underlying asset will decline over time below the exercise price (Long Put).
The investor will then profit by either selling or exercising the option. The maximum profit is thereby limited to the exercise price less the premium when the value of the asset is declined to zero at the time of exercise.
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If investors write a put contract, they estimate that the price of an asset will stay above the exercise price (Short Put). they have the obligation to buy the asset whenever the buyer of the put exercises his right to sell.
The profit is limited to the premium they receive from the buyer for the put contract. the maximum loss for the seller is equal to the exercise price less the premium received from the buyer. In both cases is the investor at a breakeven when the value of the asset is equal to the exercise price minus the premium.
Strategies with options can be used, for example, to reduce an investor’s exposure without selling the underlying stock position. the ‘Protective Put’ strategy requires the investor to buy a put for his long position which will provide downside protection in case the stock declines in value but will retain the upside potential of the stock position. this strategy, however, requires a payment of cash upfront for the premium.
