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Simple English definitions for legal terms
put option
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A quick definition of put option:
A put option is a type of financial tool that allows the owner to sell a certain asset, like stocks or commodities, at a specific price within a certain time frame. The owner of a put option hopes that the price of the asset will go down, so they can sell it for more than it's worth. The person who has to buy the asset is called the call option holder. If the price of the asset drops below the agreed-upon price, the owner of the put option can sell it and make a profit. The Securities and Exchange Commission has a sample contract that shows how a put option works.
A more thorough explanation:
A put option is a type of financial instrument that gives the owner the right to sell an underlying security at a pre-determined price within a specific timeframe. This underlying security can be anything from stocks, currencies, bonds, commodities, or index funds.
The owner of a put option is betting that the price of the underlying security will decrease in the future. If this happens, the owner can force the other party to buy the security at a price that is higher than the market value. The more the value of the underlying security decreases, the more valuable the put option becomes.
For example, let's say you own 100 shares of XYZ Company, and you're worried that the stock price will drop in the next few months. You could buy a put option that gives you the right to sell those shares at a pre-determined price. If the stock price does drop, you can exercise the option and sell your shares at the higher price, making a profit.
It's important to note that the party who has the obligation to purchase the underlying security from the put option owner holds a call option. The put option owner can exercise their option when the underlying security drops below the pre-determined price, plus any additional amount to make up for the cost of the put option contract.
Overall, put options can be a useful tool for investors who want to protect themselves against potential losses in the stock market or other financial markets.