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Put Options: Not as Complicated as they Seem


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Get The Most Out Of Put Options

Put OptionsPut options are all too often ignored by investors who are new to playing the market. Websites and financial advisers often try to explain this type of option with a mathematical formula that can be intimidating for those used to simple financial contracts. While puts may seem complicated at first, however, the underlying concept is actually quite simple. First and foremost, a put is an option. Options are derivatives similar to stocks, bonds and futures. They are particularly similar to futures, as they specify a contract for a future transaction. Like a future, an option specifies the quantity and price of a transaction that will take place between two parties. The date of maturity is the date at which the transaction will take place. When two parties enter into a futures contract, they are both required to complete the transaction at the specified date. When two parties enter into an options contract, however, the investor has the right to choose whether they want to complete the transaction.

 Get Specific with Put Options

A put option is a type of options contract that specifically refers to the exchange of an asset. The asset, the price and the date of maturity are all specified at the start of the contract. The investor reserves the right to sell the asset at the predetermined price. The issuer has an obligation to buy the asset, should the investor choose to sell.

There are three main types of put options and each offers slightly different features. An investor who buys an American option can choose to sell it at any time until the option reaches maturity. An investor who buys a European option can sell it only once the option has reached maturity. An investor who buys a Bermuda option can sell it on a handful of dates specified in the contract. No matter which type is bought, however, put options really do offer investors the most options.

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