What Is A Put?

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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