What It Is:
A put is a financial term that refers to a put option, or a contract between the buyer and seller of a securities option allowing the buyer to force the seller (or the writer of the option contract) to buy the security. The term also means, in a generic sense, the option to make another party purchase something.
How It Works/Example:
In options trading, a buyer may purchase a short position (i.e., the expectation that the price underlying security at an agreed-upon price (i.e. the strike price) by a certain date. If the market price falls below the strike price, as expected, the buyer can decide to exercise his or her right to sell at that price and the writer of the contract has the obligation to buy the security at the strike price. With the exercise of the put, the trader makes the difference between the cost of the security in the (i.e., a lower price than the option strike price) and the sale of the option to the put writer (i.e., at the strike price).
For example, if a trader purchases a put option contract for Company XYZ for $1 (i.e., $.01/share for a 100-share contract) with a strike price of $10 per share, the trader can sell the at $10 before the end of the option period. If Company XYZ's share price drops to $8 per share, the trader can buy the on the open and sell the put option at $10 per share (the strike price on the put option contract). Taking into account the put price of $.01/share, the trader earn a of $1.99 per share.
In a generic context, to put something means to force the purchase of something. For example, you might buy a piece of , and the seller might negotiate the right to put a second parcel to you at a later date if land prices do not increase by then.
Why It Matters:
The ability to put an asset off your hands for a set price. Alternatively, puts can also be risky. If someone has the right to put something to you later, you run the risk of having to buy something down the road that you didn’t plan on buying. Investors often purchase a put on they already own to act as a against the decline in the share price. Puts and calls are the key types of options trading.is essentially like having an insurance policy. If prices aren’t great later, at least you can force someone to take the