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Put Option | What Is A Put Option, How It Works & How To Trade Them In Stock Market

what are put options and how do they work

The put option (also known as “put”) is a contract that gives the buyer the right, but not the obligation, to sell—or sell short—a fixed amount of the underlying asset at a predetermined price within a given time frame. The predetermined price at which the buyer of the put option may sell the underlying security is known as the striking price.

Put options are traded on a range of underlying assets, including equities, currencies, bonds, commodities, futures, and indexes. A call option gives the holder the right to buy the underlying security at a predetermined price on or before the option contract’s expiration date, in contrast to a put option.

As the price of the underlying stock or investment drops, a put option becomes more attractive. A put option, on the other hand, loses value as the price of the underlying stock rises. They are therefore frequently employed for hedging purposes or to make downward price action speculations.

Put options are frequently employed by investors in the protective put risk management method, which is used as a type of investment insurance or a hedge to guarantee that losses in the underlying asset do not surpass a particular amount. In this approach, the investor purchases a put option to protect against stock declines in a holding. The investor would sell the stock at the strike price in the event that the option was exercised.

Due to the effect of time decay, a put option’s value typically declines as the time to expiration draws near. With less time to earn a profit from the deal, time decay quickens as an option’s time to expiration approaches. The intrinsic value of an option is what remains after the temporal value has been lost. The discrepancy between a stock’s underlying price and the strike price is what determines an option’s intrinsic value.

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