What Is A Put?

Adin Lykken

Reviewed by

Adin Lykken WSO Editorial Board

Expertise: Consulting | Private Equity

A put is an option which gives the owner the right, but not the obligation, to sell an asset at a pre-determined price within a given time period.

An investor would buy a put option on an asset when they believe it is going to decrease in price.

An example of how a put option works is as follows:

  • On October 1st, the stock price of Morgan Stanley is $15
  • The cost of a December put with a strike price of $10 is $2
  • The total cost of the contract is $2 x 100 = $200
  • The breakeven point is $8 per share (10-2)
  • On November 1st, the stock price of Morgan Stanley is $17
  • This is more than the strike price so the option is worthless and the current loss is $200
  • On December 1st the stock price of Morgan Stanley is $3
  • The profit on the put option is ((10-2-3) x 100) = $500
  • The maximum loss on the option is always $200 (the lowest it can be valued is 0) but the maximum profit is ((15-2-0) x 100) = $1300 and the starting investment is very small

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Adin Lykken

Adin Lykken is a member of WSO Editorial Board which helps ensure the accuracy of content across top articles on Wall Street Oasis. Currently, Adin is an associate at Berkshire Partners. Prior to joining Berkshire Partners, Adin worked for just over three years at The Boston Consulting Group as an associate and consultant and previously interned for the Federal Reserve Board and the U.S. Senate. Adin graduated from Yale. This content was originally created by member WallStreetOasis.com and has evolved with the help of our mentors.