Definition: The right, but not the obligation, to force another investor to buy one’s shares of a company’s stock for a specific price (ie: the strike price) on or before its expiration date.Example: Marcela purchases the right to put Proto Corp’s shares to another investor for $30 any time between now and next June. Proto’s share price is currently $33. She pays $2 per share (ie, the option premium) to own the put option.
Investeach explains: Options are very risky and are suitable only for people with substantial financial education and investing experience who truly understand them. In our example, unless Proto’s share price falls to $30 by next June, the $2 per share Marcela paid will be completely lost! The stock has to drop to $28 before she can earn any profit.
Notice that buying a put option is a strategy that makes money when stocks fall. Another, less aggressive way to benefit from falling stock prices is to sell short.
Options can be bought and sold. For example, Marcela can sell a put option, allowing another investor to force her to buy from him the shares he currently owns. Marcela might sell a put option on a company if she believes there’s little chance that its stock price will fall.
Riddle me this:
1. What does a put option enable an investor to do?
2. Why are options suitable for advanced investors only?
3. What do we call the price the option allows the owner to put the shares to another person for?
4. What do we call the date on which the option goes away?
5. What do we call the amount the investor pays to own the option?
Opposite of: Call option.