Put: Seller's Perspective

The Opportunity
Although there is plenty of uncertainty in the outcome of the planning committee, real estate is generally a solid investment. More than likely, even in the short term, the price of the property will increase…at the very least, it’ll remain the same.

Risk
The agent knows full well what the risks are. If the property becomes worthless, he’d likely have to purchase the property for $100,000. If this occurs, the agent would then have ownership of the property.

Selling the Put
For the seller, the put represents an opportunity to enhance his investment. He can collect the premiums, and only face a purchase if there’s a decrease in the value of the property. Also, by selling the put, the agent has discounted the price of entry into buying the property. For example, if the seller is exercised, the agent will have effectively bought the property for $95,000 ($100,000 (strike) - $5,000 (premium)).

The Win #1
The planning commission decides to allow development of neighborhoods, or to allow the development of the mall. The land remains constant, increases, or skyrockets. The agent is able to pocket $5,000. Since he had $100,000 at risk, this is a 5% profit.

The Win #2
The planning commission decides to continue deliberations. The put option expires worthless. However, the landowner knows she must again purchase the put in order to protect her property.

The Win #3
The agent is actually interested in purchasing the land. However, he feels the $100,000 price tag is a little too high. However, $95,000 would be a good price, in the agent’s mind. If there is a drop in the value of the property, and the landowner decides to exercise, the owner would have a cost basis of $95,000.

The Injury
The planning committee decides to put a sewer and water treatment facility in the area. The value of the property drops to $10,000. The seller, of course, decides to “put it to the agent”, and exercises the option. The agent must pay $100,000 for some property that’s worth $10,000.