Put options

A put option gives the buyer of the option the right to sell the underlying asset at a fixed price at any time prior to the expiration date of the option. The buyer pays a price for this right.

At expiration,

• If the value of the underlying asset (S) < Strike Price(K)
  • -> Buyer makes the difference: K-S
• If the value of the underlying asset (S) > Strike Price (K)
  • -> Buyer does not exercise

More generally,

• The value of a put decreases as the value of the underlying asset increases
• The value of a put increases as the value of the underlying asset decreases

A Pay-off Diagram for a buyer of put option looks like this: you start out with a loss and gain profit if the actual share price becomes lower than the strikeprice. Buying a put option buys you protection against lower stock prices.

javascript:;

A Pay-off Diagram for a seller of put option ('writing' a put') looks like this. In the interactive diagram below, the purple line represents the put for the seller:

See also: Call options