Let’s Look At Put Options
An option contract is a financial derivative that represents the buyer of a contract sold by the writer. Options can be both calls and puts. These trading methods have been shown to work for any number of financial assets. These include stocks, bonds, commodities, currencies, indexes, and futures.
A put option gives the holder the right but not the obligation to sell a certain amount of an underlying asset or security at a predetermined price. This price is called the strike price. Both call and put options can be either out-of-the-money (OTM), at the money, or in the money (ITM). This price situation defines the type of derivative, whether it's a call or a put. It relates to the strike price and the underlying asset (stock) and is determined by the holder's opinion about how an underlying asset will perform.
A put option is in-the-money if the strike price is higher than the current market price of the underlying asset. The holder has the right to sell the underlying at prices higher than the current market price. When an option is in the money, it allows for instant profit if someone were to choose to buy the shares back at its current price. The price of an ITM put will follow changes in the underlying asset.
How Do Put Options Operate? (Reference Investopedia.com)
A put option buyer has the right but not the obligation to sell a specified quantity of the underlying security at a predetermined strike price on or before its expiration date. On the other hand, the seller or writer of a put option is obligated to buy the underlying security at a predetermined strike price if the corresponding put option is exercised.
Put options are used as downsize protection, which are strategies used to mitigate—if not completely prevent—a drop in its value. The reason being is that owning the underlying asset with the right to sell it at some price effectively gives you a guaranteed floor price. Put options can also be used to speculate on an underlying if you think that it will go down in price. Thus, a put can give short market exposure with limited risk if the underlying security does, in fact, rise.
