Put options definition

What are put options

Put options are a variety of option that give the purchaser the right, but not the obligation, to sell an asset at a certain price before the option expires.

They differ from call options, which give the purchaser the right (but once again, not the obligation) to buy an asset at a certain price before the option expires.

Put (and call) options will stipulate the amount of the asset being traded at the outset, alongside the strike price (the price at which the asset can be sold) and the expiry (the length of time the option will be available for). 

How put options work

The purchaser of a put option pays a premium to the writer (the term given for the seller) to buy the option. If the purchaser does not exercise the option by selling the asset before the option expires, it will cancel and the writer will take the premium as profit.

As such, the writer of a call option is expecting that the asset they have agreed to sell will not drop in price beyond the strike price. The buyer is expecting that it will.

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