# Buyer of a put option

The buyer has the right to sell the stock at the strike price. If the stock price completely collapses before the buyer of a put option position is closed, the put writer potentially can face catastrophic loss. A put option is said to have intrinsic value when the underlying instrument has a spot price S below the option's strike price K. This article needs additional citations for verification. Unsourced material may be challenged and removed.

The most obvious use of a put is as a type of insurance. Unsourced material may be challenged and removed. Moreover, the dependence of the put option value to those factors is not linear — which makes the analysis even more complex. The graphs clearly shows the non-linear dependence of the option value to the base asset price. The purchase of a put option is interpreted buyer of a put option a negative sentiment about the future value of the underlying.

Views Read Edit View history. The writer receives a premium from the buyer. The put writer's total potential loss is limited to the put's strike price less the spot and premium already received.

If the option is not exercised by maturity, it expires worthless. In buyer of a put option way the buyer of the put will receive at least the strike price specified, even if the asset is currently worthless. If the buyer fails to exercise the options, then the writer keeps the option premium as a "gift" for playing the game. From Wikipedia, the free encyclopedia. If the underlying stock's market price is below the option's strike price when expiration arrives, the option owner buyer can exercise the put option, forcing the writer to buy the underlying stock at buyer of a put option strike price.

Another use is for speculation: A put option is said to have intrinsic value when the underlying instrument has a spot price S below the buyer of a put option strike price K. If the strike is Kand at time t the value of the underlying is S tthen in an American option the buyer can exercise the put for a payout of K-S t any time until the option's maturity time T. Energy derivative Freight derivative Inflation derivative Property derivative Weather derivative.

The following factors reduce the buyer of a put option value of a put option: The put yields a positive return only if the security price falls below the strike when the option is exercised. In the protective put strategy, the investor buys enough puts to cover his holdings of the underlying so that if a drastic downward movement of the underlying's price occurs, he has the option to sell the holdings at the strike price.

The seller's potential loss on a naked put can be substantial. The graphs clearly shows the non-linear dependence of the option value to the base asset price. A naked putalso called an uncovered putis a put option whose buyer of a put option the seller does not have a position in the underlying stock or other instrument. That allows the exerciser buyer to profit from the difference between the stock's market price and the option's strike price. Unsourced material may be challenged and removed.

If the stock price completely collapses before the put position is closed, the put writer potentially can face catastrophic loss. If the stock falls all the way to zero bankruptcyhis loss is equal to the buyer of a put option price at which he must buy the stock to cover the option minus the premium received. That is, the seller wants the option to become worthless by an increase in the price of the underlying asset above the strike price.

The following factors reduce the time value of buyer of a put option put option: If the buyer exercises his option, the writer will buy the stock at the strike price. The buyer has the right to sell the stock at the strike price. A European put option allows the holder to exercise the put option for a short period of time right before expiration, while an American put option allows exercise at any time before expiration.