Put Options

A put option is a contract that allows the sale of the underlying at a given strike price, within a given period of time. A put option typically involves two parties: the option buyer and the option seller. The option buyer has a long position, while the seller has a short position. Once the option is purchased, the option buyer is in control of what happens next. (S)He can choose to exercise, or go through with the sale of the underlying asset, or (s)he can choose to let the option expire. If the buyer does choose to exercise, the seller must fulfill the contract at the agreed upon price.

While there are varying strategies for buying or selling options, covered more in strategies, here we will discuss the basics from the point of view of the call buyer and seller using the real estate example.

Let’s assume the owner of the property goes to an insurance agent, that tells her she can recoup the $100,000 value of her property within the next three months. Let’s assume she pays $5,000 for this protection.