Put Option

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A call optionoften simply labeled a "call", is a financial contract between two parties, the buyer and the seller of this type of option.

The seller or "writer" is obligated to sell the commodity or financial instrument to the buyer if the buyer so decides. The buyer pays a fee called a premium for this right.

The term "call" comes from the fact that the owner has definition put option wikipedia right to "call the stock away" from the seller. Option values vary with the value of the underlying instrument over time. The price of the call contract must reflect the definition put option wikipedia or definition put option wikipedia of the call finishing in-the-money. The call contract price generally will be higher when the contract has more time to expire except in cases when a significant dividend is present and when the underlying financial instrument shows more volatility.

Determining this value is one of the central functions of financial mathematics. The most common method used is the Black—Scholes formula.

Importantly, the Black-Scholes formula provides an estimate of the price of European-style options. Adjustment to Call Option: When a call option is in-the-money i. Some of them are as follows:. Similarly if the buyer is making loss on his position i.

Options calls and puts

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Can't someone write a proper layman's definition of a put option? Even the 'example' given uses specialist terminologies. Aren't the only likely people who visit this article people who do NOT know what a put option is suxh as myself , nor are they likely to be familiar with it's terminologies. Whereas this article was written by an expert FOR an expert.

This article is unnecessarily complicated, especially since put options are pretty simple concepts see [1] — Preceding unsigned comment added by Hey why can't you give some numerical explanation or examples for put option for a layman to understand. Though I obviously feel that this is a very simple theory, the unnecessary complecated, ambiguous language in the article, makes this seem extremely difficult to understand.

I have no idea how to interpret the graphs, and I pretty much understand how a put option works. I liked the graphs and found them very helpful in understanding how options work. Different people use different ways to learn. Can you please restore the graphs? The put buyer either believes that the underlying asset's price will fall by the exercise date or hopes to protect a long position in it.

The advantage of buying a put over short selling the asset is that the option owner's risk of loss is limited to the premium payed for it, whereas the asset short seller's risk of loss is unlimited its price can rise greatly, theoretically, infinitely, all the short seller's loss. Rgeards, Shitij Malik —Preceding unsigned comment added by This article is mixing up the writer with the buyer in the first and second paragraphs. However, if the strike price is lower, then the writer seller has less risk since a given stock is less likely to drop more significantly.

And yet, the writer would be paid a higher premium? Higher premium for less risk? Again, this makes no sense.

I believe to calculate the premium paid to the seller for a given puts contract is a very complex financial formula. I looked up puts after reading about them on a blog an hour ago, so I am new to this, but I am pretty sure the current calculation given for the premium is wrong. Additionally, the article has no mention of the importance of the duration of the put contract. A contract with a longer duration is of course more risky for the seller as the stock has a better chance of dipping below the strike price, and thus the seller will be paid a higher premium the longer the contract.

The first paragraph left my very non-financial head spinning. I've noted the confusing points with asterisks:. Here, the buyer is selling and the seller is buying. Was this a series of mistakes, or is finance-o-speak typically written backwards like this? If it is, wow!

Thanks for clarifying this arcane process for us less market savvy types. I would rewrite but I have no financial knowledge. And from reading this, I still have none: A "put" or "put option" is an option to sell an item at a preset price at some time in the future. That is it is a contract between two parties where one party the buyer of the put has the option, but not the obligation, to sell an item, typically a commodity or financial instrument such as a stock, to the other party the seller of the put at future date and at a predetermined price the strike price lower than the current market price.

If the price of the specified item does not drop below the strike price within the time period specified by the contract neither party has any further obligation and the transaction is complete. If the price does drop below the strike price, the seller of the put has an obligation to buy the item from the other party at the strike price, so the seller or writer of the put has a maximum exposure set by the strike price should the market price of the item being optioned drop to zero.

Although neither party has to own the item being optioned at the time the contract is written, the prototypical case is where the buyer of the put does already own the item and wants to reduce their risk should its market price drop.

Whereas the seller of the put does not own the object but is willing to accept future risk in exchange for immediate compensation. The perceived risk effectively determines the price of the put. In this transaction, the buyer of the put is paying money upfront in order to reduce potential loss should the market price of the item drop.

Therefore the buyer believes the market price will rise, but also recognizes a possibility that the price will drop and wants to set a floor on their future potential losses.

The seller of the put is being paid to take on that risk should the market price drop and therefore they also beleive the price will rise but are able to tolerate more risk than the seller. The existing article is pretty confusing. I tried to start simple and also explain motivations, but I will leave it to someone else to change the article.

The only reason it would have any value at all is if the exercise date was a long way off in the future I'm new to this and maybe I've just got confused, but that's what I thought when I read it.

I don't understand, why would anyone write a put? This article suggests that unless the stock price doesn't drop, the person who wrote the put loses money. Nothing wrong with the answers so far, per se, but they all kind of miss the point of the original question posed. Big institutions can write puts because they have the ability to hedge efficiently. The option premium they charge covers the expected cost of hedging plus a little extra their expected profit. The existence of hedging strategies means the put seller doesn't have to worry about the upward or downward drift of the underlying's price.

In fact, it's even better than that for these big guys I would disagree with folding the section on "Naked Puts" into the "Put Options" page. Of course the two should be linked, but whereas the underlying concept is the same, the ethical aspect is not.

Selling what you do not have may have been fine during the previous decade's tumultuous, but rising, market. However, with the advent of this recent global financial crisis, chinks in the armor of the financial system have begun to show. One of those faults has been the growing inability for unsophisticated investors who have overextended themselves to meet their obligations, as well as the increasingly apparent problem of the very complex web of trades that are not formally registered with any sort of clearing authority.

The latter problem is supposedly being dealt with, in the U. Sorry not to have gotten back to this sooner, but my work schedule does not permit me to do much. Allow me to explain what I mean by an ethical issue. We would not very well combine the "investment" and "gambling" pages would we? Even though there are clearly elements of gambling in investment, and vice versa, we still hold, as a society, to the idea that investment involves the provision of capital by investors to the business community in hopes of developing some sort of viable operation that would contribute to the economy.

Yes, modern punters, on the whole, look more at how the market moves than how they can participate in profiting from the market's development; and, statistically, one has about the same chance of selecting winners by tossing a dart as through complex modeling. Business ethics is a course taught in every business school today, though few seem to adhere to the principles they learn.

Selling something one does not have, and could not guarantee he would be able to lay hands on, is fraud. At the very least such an action, as demonstrated in the recent VW-Porsche debacle, might be considered malpractice on the part of the professionals who are supposed to be acting on our behalf.

In the introduction it is written: Taking a short position in general means selling an option, not, as stated above, buying an option.

For the sentence to be true, "short" should be replaced by "long". It can be checked here: Hull 2nd edition , page 7. The buyer of the put option acquires a short position by purchasing the right to buy the underlying instrument from the seller of the option for a specified price the strike price during a specified period of time.

If the option buyer exercises his right, the seller is obligated to sell the underlying instrument to him at the agreed-upon strike price, regardless of the current market price. In exchange for having this option, the buyer pays the seller or option writer a fee the option premium. Put options offer insurance against excessive loss by providing a guaranteed buyer and price for an underlying instrument.

In addition, the seller of put options can profit by selling put options that are not utilised. Such is the case when the ongoing market value of the underlying instrument makes the option useless, usually when the current market price of the underlying instrument remains above the strike price.

Holders of put options may also profit from the potential to sell the underlying instrument at a price greater than current market value and could then repurchase the underlying instrument at the reduced price to gain a profit. I find the graphs of poor quality.

They do not show the intersection of the payoff function with the vertical axis, which is important to see in order to see the limited upside in the case of a buyer or limited downside in the case of a seller. In addition, I really don't get the funny jagged bumps. What is the point of them? I thing when talking about the payoff it is necessary to include the multiplier!!