What is a put option?

A put option is a type of financial contract that gives the holder the right, but not the obligation, to sell a specific asset (such as stocks, bonds, or commodities) at a predetermined price within a specified time period. Put options are commonly used to hedge against potential losses in a declining market or to speculate on the price movement of an underlying asset.

How does a put option work?

When an investor purchases a put option, they pay a premium to the seller (also known as the writer) of the option. In return, the investor acquires the right to sell the underlying asset at the agreed-upon price (known as the strike price) on or before the expiration date of the option. If the price of the underlying asset falls below the strike price before the option expires, the investor can exercise the put option and sell the asset at a profit.

Key features of a put option:

• Strike price: The price at which the asset can be sold.
• Expiration date: The date by which the option must be exercised.
• Premium: The price paid for the option.
• Profit potential: Put options allow investors to profit from a decline in the price of the underlying asset.