Editing Put option (section)

{{Short description|Contract giving a seller the right to sell an asset to the buyer at a set price}}
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In [[finance]], a '''put''' or '''put option''' is a [[derivative (finance)|derivative]] instrument in [[financial market]]s that gives the [[Shareholder|holder]] (i.e. the purchaser of the put [[Option (finance)|option]]) the right to sell an [[asset]] (the ''underlying''), at a specified price (the [[Strike price|''strike'']]), by (or on) a specified date (the ''[[expiry]]'' or [[Maturity (finance)|''maturity'']]) to the ''writer'' (i.e. seller) of the put. The purchase of a put option is interpreted as a negative [[Market sentiment|sentiment]] about the future value of the underlying [[stock]].<ref>{{cite SSRN |title=Retail Investor Sentiment and the Stock Market |ssrn = 1100038 |author1=Matthias Burghardt |author2=Marcel Czink |author3=Ryan Riordan |date = 29 February 2008 }} page 15 | 4.2.3 Positive and negative sentiment</ref> The term "put" comes from the fact that the owner has the right to "put up for sale" the stock or index.

Puts may also be combined with other derivatives as part of more complex investment strategies, and in particular, may be useful for [[Hedge (finance)|hedging]]. Holding a European put option is equivalent to holding the corresponding [[call option]] and selling an appropriate [[forward contract]]. This equivalence is called "[[put-call parity]]".

Put options are most commonly used in the stock market to protect against a fall in the price of a stock below a specified price. If the price of the stock declines below the strike price, the holder of the put has the right, but not the obligation, to sell the asset at the strike price, while the seller of the put has the obligation to purchase the asset at the strike price if the owner uses the right to do so (the holder is said to ''exercise'' the option). In this way the buyer of the put will receive at least the strike price specified, even if the asset is currently worthless.

If the strike is {{mvar|K}}, and at time {{mvar|t}} the value of the underlying is {{math|S(t)}}, then in an ''American option'' the buyer can exercise the put for a payout of {{math|''K''−S(t)}} any time until the option's maturity date {{mvar|T}}. The put yields a positive return only if the underlying price falls below the strike when the option is exercised. A ''European option'' can only be exercised at time {{mvar|T}} rather than at any time until {{mvar|T}}, and a ''Bermudan option'' can be exercised only on specific dates listed in the terms of the contract. If the option is not exercised by maturity, it expires worthless. (The buyer will not usually exercise the option at an allowable date if the price of the underlying is greater than {{mvar|K}}.)

The most obvious use of a put option is as a type of [[insurance]]. In the protective put strategy, the investor buys enough puts to cover their holdings of the underlying so that if the price of the underlying falls sharply, they can still sell it at the strike price. Another use is for [[speculation]]: an investor can take a short position in the underlying stock without trading in it directly.