A put option is a put option. Gives the buyer the right (but not the obligation) to sell an option asset to the seller in the future at a pre-determined price.
The owner or buyer of a put option benefits from the option if the underlying asset falls, that is, if when the expiration date of the put option arrives, the asset (a share for example) has a lower price than the agreed price. . In that case, the buyer of the option will exercise his right and sell the asset at the agreed price and then buy it at the current market price, earning the difference.
If the price turns out to be higher than the agreed price, known as the strike or strike price, the buyer will not exercise his right and will simply have lost the premium he paid to acquire the option. Therefore, your benefit may be unlimited, but your loss is limited to the premium you paid.
Buyer’s profit can be more easily seen on a graph. Where PE is the price the exercise, Bº is the profit of the option and Pª, the loss. The price of the underlying asset is larger as we move to the right.
For the put option seller, just the opposite occurs. Your maximum profit will be the value for which you sold the option, which you will have as long as the asset does not drop in price. And as the price of the asset goes down, its profit is diluted, until it reaches a point where it enters losses and from there its losses are limited.
The value of the put option on the expiration date will always be greater than or equal to zero. Its value is the maximum of zero or a variable. This variable is the exercise price less the present value of the asset. Being S the price of the asset at the end of the established period.
Put = max (0, PE – S)
The opposite option is a call option.
To see in more detail what financial options are you can see Financial options – What are they? and Financial options – Types and example
Result structure of a put option
The buyer acquires the right but not the obligation to sell the underlying asset at a specified price, in a period of time not exceeding a specified date. The seller of the put option assumes the obligation to buy the underlying asset, if the option is exercised.
When an investor buys a put option, he has a bearish expectation; It expects that the price of the underlying asset will be below a price equivalent to the exercise price of the option, from which the value of the premium should be subtracted, in a period of time not exceeding the expiration date of the option.