Put

An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying asset at a set price within a specified time. The buyer of a put option estimates that the underlying asset will drop below the exercise price before the expiration date.

The possible payoff for a holder of a put option contract is illustrated by the following diagram:

When an individual purchases a put, they expect the underlying asset will decline in price. They would then profit by either selling the put options at a profit, or by exercising the option. If an individual writes a put contract, they are estimating the stock will not decline below the exercise price, and will not increase significantly beyond the exercise price.

Consider if an investor purchased one put option contract for 100 shares of ABC Co. for $1, or $100 ($1*100). The exercise price of the shares is $10 and the current ABC share price is $12. This contract has given the investor the right, but not the obligation, to sell shares of ABC at $10.

If ABC shares drop to $8, the investor's put option is in-the-money and he can close his option position by selling his contract on the open market. On the other hand, he can purchase 100 shares of ABC at the existing market price of $8, then exercise his contract to sell the shares for $10. Excluding commissions, his total profit for this position would be $100 [100*($10 - $8 - $1)]. If the investor already owned 100 shares of ABC, this is called a "married put" position and serves as a hedge against a decline in share price.

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Related Terms

Option
Short (or Short Position)

-- 0-1 Definitions --401 k plan52 week high low10 q10 k wrap10 k529 plan8 k

-- A Definitions --abnormal returnabove the marketabsolute returnaccrual rateabsolute breadth index abiaccrueacross the boardaccumulation distributionaccumulative swing index asiactive index fundactive investingactive managementactual total lossactual returnadding to a loseradjusted closing priceadvance decline indexadvisoradvance decline line a dafter hours market closeafter hours trading ahtafter market performanceafter the bellaggressive growth fundair pocket stockaggressive investment strategyalan greenspanalgorithmic tradingall cap fundalpha generatorall or none aonalphaamerican stock exchange amexanalyst sponsorshipanalystangel investorannual percentage rate aprannual percentage yield apyannual reportannual returnanonymous tradingarbitragearoon indicatoraroon oscillatorascending channelascending topsascending triangleask sizeaskassessable stockat the close orderat the marketat the opening orderauction marketautomated forex tradingautomatic investment plan aipautomatic reinvestment planauthorized stockaverage annual yieldaverage cost basis methodaverage cost methodaverage directional index adxaverage downaverage priceaverage returnaverage selling price aspaverage upaway from the marketax

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-- Q Definitions --quarterly earnings reportqstick indicatorquadrixqualified dividendqualified distributionquotationquote

-- R Definitions --rate of changerangerate of returnrallyrandom walk theoryratings servicereal time trade reportingreal rate of returnreal timerealized gainrealized yieldrealized lossreallowancerecognized gainrecognized lossrecord daterecord lowrecord highrectanglered candlestickred chipregistered investment advisor riaregular way trade rwregistered securityreinvestmentrelative returnrelative strength index rsirelative strengthrelative vigor index rvirenko chartresistance resistance level restricted stockretracementreturn on capital gainsreturn on investment roireturnreversalreverse stock splitrising bottomrisk adjusted returnrisk arbitragerisk capitalriskrogue traderroth 401 k roth ira conversionroth iraround trip tradingrounding bottomrounding toprule 10b 18rule 10b 5rule 144rule 144arule 147rule 72 t rule of 18rule of 72runaway gaprule of 78russell 1000 indexrussell 2000 indexrussell 2500 indexrussell 3000 indexrussell 3000 value indexrussell microcap indexrussell midcap indexrussell small cap completeness indexrussell top 200 indexrussell top 50 index

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