Definition of Put Option
What is a Put Option
A put option is the contractual right, but not the obligation, to sell a security, commodity or other asset at a specific price within a specific time frame. The predetermined selling price is called the strike price.
The right can be exercised either on or before the expiration date for American options but European options can only be exercised at expiration. Put options can be used as a hedge or for speculation. They can also be combined with other option contracts to create trading strategies, such as an option spread strategy.
The price of a put option is influenced by the changes in the price of the underlying asset, the option strike price, time decay, interest rates and volatility. Put options increase in value when the underlying asset falls in price, the volatility of the underlying asset increases or as interest rates decline.
Long Put vs Short Put
A long put is an open put option on a security or any other underlying asset that has been bought. A long put is a strategy that can be used when there is bearish sentiment on the underlying and the price is expected to decrease.
A short put is an open put option position on a security or any other underlying asset that has been sold. A short put is a strategy that can be used when there is bullish sentiment on the underlying and the price is expected to increase or stay at the current price.
Glossary of Terms and Phrases
A financial dictionary or glossary is an essential tool to better understand the meaning of a specialized term or phrase. It would obviously make life much easier if everyone spoke the same language and used the same financial terms and phrases but that is not realistic.
We learn new languages to communicate with each other, transact business globally and to appreciate other cultures. Global finance is a specialized language that if understood and mastered, it will provide benefits that help to decrease risk and improve investment returns. Financial literacy is the foundation of developing good investment strategies and sound decision making.