The Options Trading Body of Knowledge by Michael C. Thomsett

Author:Michael C. Thomsett [Thomsett, Michael C.]
Language: eng
Format: epub, mobi
Tags: Business & Economics, Investments & Securities, Finance
ISBN: 9780137142934
Publisher: FT Press
Published: 2010-01-02T00:00:00+00:00

A Put Is the Right to Sell 100 Shares

A put is the opposite of a call. This option grants its owner the right, but not the obligation, to sell 100 shares of stock at a fixed strike price, on or before a specific expiration date. Just as a call owner hopes the value of the stock will rise, a put owner hopes the value of the stock will fall. The more the price falls, the more valuable the put becomes.

A put buyer might take one of three actions before expiration. The put can be closed at its premium value and a profit or loss taken. The put can also be allowed to expire worthless, which occurs if the underlying stock is at or above the strike price at the time of expiration. Finally, the put can be exercised. This means the owner is allowed to sell 100 shares of the underlying stock at the fixed strike price. For example, if a trader owns 100 shares purchased at $50 per share and also buys a 50 put, exercise will occur at that price. If the stock’s value falls to $41 per share before expiration, the put owner can exercise the put and sell 100 shares for $50 per share, even though current market value is far lower. The put protects the stock investor from the decline by offsetting the stock loss in the appreciated value of the put.

A put seller grants the option rights to a buyer. So if a trader sells a put, it means that he might be obligated to accept 100 shares of the underlying stock at the fixed strike. If the strike is 50 and the current market value of the stock falls to $41 per share, the put will be exercised. The put seller will have 100 shares put to them at the fixed price of $50 per share, or nine points above current market value.

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