Put option
A distinction is made between the position of the holder (“long put”) and that of the writer (“short put”).
A put option (English option put , therefore the names put option , Vanilla Put and brevity of or put ) is one of the two basic variants of an option . The holder of a put option has the right, but not the obligation, to sell a fixed amount of a certain underlying asset at a predetermined price ( strike price ) within a certain period of time (American options) or at a certain point in time (European options) .
Because of this construction, the price of a put option tends to rise when the price of the underlying asset falls; conversely, the price of the put option usually falls when the price of the underlying asset rises.
The second basic variant of options is the purchase option .
functionality
The seller of the put option - he is called the writer - is obliged to buy the underlying. For this obligation he receives the option premium from the buyer of the option.
The buyer of the put option - he is called the owner - will only exercise his right if the price of the underlying is below the exercise price.
Whether the base value is delivered when the option is exercised - this is referred to as physical delivery - or a cash settlement takes place is already determined when the contract is concluded. In practice, the type of exercise with cash settlement is the most widespread. In the case of cash settlement, the writer of the put option pays the option buyer the difference between the exercise price and the price of the underlying at the agreed time.
From the perspective of the holder, the option price of a put option corresponds to an insurance premium against the threat of a decline in the value of the underlying asset.
An early exercise of the option is usually not an advantage due to the remaining fair value. When exercising, one would only receive the intrinsic value, when selling the intrinsic value plus the current value. In practice, it can still make sense to exercise it if either no price is offered for the option on the market or if the bid-ask spread is too large.
In contrast to a call option (call), the maximum profit that the buyer of a put option (put) can achieve is not infinite, but rather limited to the exercise value minus the option premium paid by the buyer (if the underlying asset has the value zero ).
The seller's maximum loss is the mirror image of the exercise value minus the premium received. His maximum possible profit is the bonus.
example
A grain farmer plans to sell a certain amount of grain at the future harvest time. He wants to assure himself that the grain price will fall by then. So he buys a put option on this amount of grain. If the price of the underlying asset actually falls below the strike price by the time of harvest, the seller of the option must compensate the buyer for this drop in price. The grain farmer has secured himself against a drop in the price of grain by paying an option premium.
Such transactions can in principle be concluded between any two parties without any personal reference to the underlying asset, in this case grain.
Strategies with put options (puts)
literature
- Michael Bloss: Financial futures & certificates. Introduction, basics & implementation options. Pro Business, Berlin 2007, ISBN 978-3-939430-15-5 .
See also
Individual evidence
- ↑ Duden | Put | Spelling, meaning, definition, origin. Retrieved June 27, 2018 .
- ↑ Call to refer to the purchase option , there are grammatical only in the masculine form, so that the combination put and call voice way the put is recommended.