Put option

Definition

A put option is a financial contract that gives the holder the right, but not the obligation, to sell a specified quantity of an asset at a predetermined price within a set time period. It is commonly used in risk management to hedge against potential declines in asset prices.

5 Must Know Facts For Your Next Test

1. A put option increases in value as the price of the underlying asset decreases.
2. The predetermined price at which the asset can be sold is known as the strike price.
3. Put options are often used by investors to protect against downside risk in their portfolios.
4. The premium paid for purchasing a put option represents the cost of acquiring this protective position.
5. Put options can be traded on various financial instruments, including stocks, commodities, and currencies.

Review Questions

• What is the primary purpose of purchasing a put option?
• How does a decrease in the underlying asset's price affect the value of a put option?
• What term is used to describe the price at which an asset can be sold through a put option?

Related terms

callOption: A call option gives the holder the right, but not the obligation, to buy an asset at a predetermined price within a set time period.

strikePrice: The strike price is the fixed price at which an owner of an option can buy (in case of call) or sell (in case of put) the underlying security or commodity.

hedging:

Hedging involves taking positions in derivatives or other financial instruments to offset potential losses in another investment.