Put: Buyer's Perspective

The Opportunity
The planning commission has been in committee for weeks, and there is no telling what they will announce. If there is to be something negative built in the area, the price of the land could decrease significantly. Buying this put would protect the buyer from this decrease in price, because she could sell it to the insurance agent for $100,000.

Risk
The buyer has limited risk in this endeavor. If the price of the land remains above the strike price of $100,000, she will obviously choose not to exercise the option. Thus, she will lose the $5,000 paid for the protection.

Buying the Put
For the landowner, the put represents a method to insure her investment. By buying the put, the landowner can always sell her property for $100,000, regardless of the current market value.

The Win #1
The planners approve the mall, and the value of the property skyrockets to $500,000. The landowner can then sell the property, and have a $395,000 profit ($500,000 (price of land) - $100,000 (purchase price) - $5,000 (put)).

The Win #2
The planners approve the water treatment plant. The value of the property drops to $10,000. The landowner then sells the property to the agent for $100,000. Although the property lost $90,000 in value, the landowner only lost $5,000 (the price paid for the protection).

The Insult
The planners decide to keep the status quo. The value of the land appreciates at a slow pace. Instead of the cost basis being $100,000, it’s now $105,000. Therefore, the profit margin has been decreased.

Adding Injury to Insult
The planning committee decides to approve a water treatment facility…1 day after the put expires. The value of the property drops to $10,000. Although she was correct in desiring protection, it has expired. Therefore, not only did she lose the $90,000 in the value of her property, she also lost the $5,000 she paid for the put.