Put Option
| A put option is a contract that gives the holder the right, but not the obligation, to sell a security at a specified price within a certain time period. Put options are often used as a hedging tool to protect against downside risk. For example, let's say you own shares of XYZ stock that you purchased for $100 per share. You are concerned that the stock price may fall below $100 per share in the next few months. To protect your position, you decide to buy a put option with a strike price of $95 and a expiration date of three months from now. If the stock price falls below $95 per share before the expiration date, you can exercise your option and sell your shares for $95 each, even if the current market price is lower. This allows you to lock in a minimum selling price for your shares. If the stock price does not fall below $95 per share, you can let the option expire and only lose the premium you paid for the option. Options are a versatile tool that can be used in many different ways to manage risk. Put options are just one type of option that can be used to hedge against downside risk. |
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