A put option is the opposite of a 澳洲幸运5官方开奖结果体彩网:call option. The holder has the right but not the obligation to buy an underlying security at a specified strike price before it reaches its 澳洲幸运5官方开奖结果体彩网:expiration date in the case of a call option. A 澳洲幸运5官方开奖结果体彩网:put option gives ꧒the holder the right but not the obligation to sell a certain amount of the underlying asset or security by the eꦬxpiration date at a certain price. A put that's in the money has intrinsic value.

Investing can be a very rewarding experience but it can be a little daunting, not to mention intimidating, with all the options out there. Most investors start with stocks, bonds, and mutual funds because they're the simplest and most common vehicles from which to choose. Other investments require a little more experience and research to generate a profit. 澳洲幸运5官方开奖结果体彩网:Options trading is one of them.

Put Options: An Overview

An 澳洲幸运5官方开奖结果体彩网:options contract is a financial derivative that represents a holder who buys a contract sold by a writer. Optionღs can be both calls and puts. Both can be used to trade any number of underlying assets or securities inc♋luding stocks, bonds, commodities, currencies, indexes, and futures.

This price is referred to as the strike price. Both call and put options can be either 澳洲幸运5官方开奖结果体彩网:out of the money (OTM), at the money, or in the money (ITM). This 澳洲幸运5官方开奖结果体彩网:moneyness of options des💙cribes a situation that relates the strike price of a derivative to the price of its underlying security whether they're calls or puts.

A put option that's in the money is one whose 澳洲幸运5官方开奖结果体彩网:strike price is greater than the market price of the underlying asset. The put holder has the right to sell the underlying asset at a price that's greater than where it currently trades. It allows for an immediate profit if the contract holder buys the shares back at the market price when an option is in the money. The price of an ITM put therefore closely tracks changes in the underlying asset or security.

How Put Options Work

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. 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 澳洲幸运5官方开奖结果体彩网:exercised.

Put options are used as downside protection. They're strategies used to mitigate if not completely prevent a drop in its value. 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 asset if you think it will go down in price. A put can therefore give short market exposure with limited risk if the underlying security does rise.

When Is a Put Option "In the Money?"

A put option is considered in the money (ITM) when the underlying security's current 澳洲幸运5官方开奖结果体彩网:market price is below that of the put option. It's said to be in the money because the put option holder has the right to sell the underlying security above its current market price. The right to sell has a value equal to at least the amount of the sale price less the current market price when there's a right to sell the underlying security at a price higher than its strike price.

An ITM put option is therefore one where the strike price is above the current market price. It means that the stock price is below the strike price when an investor holds an ITM put option at expiry. The option may be worth exercising. The buyer of a put option wants the 澳洲幸运5官方开奖结果体彩网:stock's price to fall far enough below the option's strike to at least cover the cost of the premium for buying the put.

The amount that a put option's strike price is greater than the current underlying security's price is known as intrinsic value because the put option is worth at least that amount.

Special Considerations

Put options allow the contract holder to lock in a price to sell the underlying asset by a predetermined time. An option is settled when it expires. It may expire worthless or with some value left. The underlying asset's price can make the value of a put and a call option fluctuate along with another factor known as its 澳洲幸运5官方开奖结果体彩网:time value.

The time value is an additional premium that investors are willing to pay above the option's 澳洲幸运5官方开奖结果体彩网:intrinsic value. The basic formula to figure out an option's time value is to subtract its intrinsic value from the premium:

$Time Value = Option Premium - Option's Intrinsic Value$TimeValue=OptionPremium−Option′sIntrinsicValue

Investors are often willing to pay this premium because they believe the value of the option will increase before it expires. An option's time value is greater when there'﷽s a greater length of time until it expires. The option's intrinsic value increases when it gets deeper in the money. Investors can use this formula to determine how much they're willing to spend for an option. You'd want to ensure that the premium is higher than the option's intrinsic value or you'd end up losing on the purchase.

How Will I Use This in Real Life?

Assume that you have a put option for shares in Company XYZ. This contract gives you the right to sell 100 shares of the company at a strike price of $100. You purchased the put option at a premium of $10 because you believed the 🅘stock price would drop before the exp▨iration date.

Your hunch proves to be correct, and the stock p🍸rice dips to $75 peꦆr share at the expiration date. The put option is in the money.

You could exercise the option and net yourself a profit of $15 per share: the difference between the strike price and the actual price of the stock, and the premium you paid, or $💖25 - $10. You get a profit of $1,500 if you multiply that by the number of shares: 100.

The Bottom Line

Investing in options can seem very intimidating at first whether you choose to invest in calls or puts. You have to wade through many fine nuances before you๊ can fully understand how they work. But you may be able to generate big returns and increase your bottom line when you get a fundamenta𓄧l understanding.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes online. Read our warranty and liability disclaimer for more info.