A put option is a financial derivative that gives the buyer the right, but not the obligation, to sell an underlying asset at a predetermined price within a specific period of time. The underlying asset can be a stock, index, commodity, or another financial instrument.
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A put option is often used to benefit from falling prices or to protect against losses.
The predetermined price is called the strike price, and the option has a fixed expiration date. If the price of the underlying asset falls below the strike price, the put option can increase in value because the holder has the right to sell the asset at a higher price than the current market price. Investors often use put options to hedge their portfolio against declines or to speculate on falling markets.
Short example:
Suppose a stock is currently trading at $100.
An investor buys a put option that gives the right to sell the stock within three months at $95.
If the stock price falls to $80, the investor can still sell the stock for $95 using the put option. This allows the investor to limit losses or profit from the price decline. If the stock remains above $95, the option may expire worthless and the investor only loses the premium paid for the option.
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