Talk:Put option

Needs to be simplified

Can't someone write a proper layman's definition of a put option ? Even the 'example' given uses specialist terminologies. Aren't the only likely people who visit this article people who do NOT know what a put option is (suxh as myself), nor are they likely to be familiar with it's terminologies. Whereas this article was written by an expert FOR an expert. — Preceding unsigned comment added by Malau (talk • contribs) 16:55, 10 September 2011 (UTC)

Agreed. This article is unnecessarily complicated, especially since put options are pretty simple concepts (see [1]) — Preceding unsigned comment added by 198.169.189.227 (talk) 18:31, 26 October 2011 (UTC)

Hey why can't you give some numerical explanation or examples for put option for a layman to understand. Though I obviously feel that this is a very simple theory, the unnecessary complecated, ambiguous language in the article, makes this seem extremely difficult to understand. Therefore, I think an example such as ""A" owned this much of shares worth this much, he bought PUT OPTIONS worth this much, he sold it at this much" and etc. will make it extremely simple and easy for a layman to understand such a simple phenomena which has been disguised with complex ambiguous language. Thank you. — Preceding unsigned comment added by 124.43.172.160 (talk) 17:51, 24 March 2015 (UTC)

Graphs

Er...could we label the axes on these graphs? Thanks. -- Calion | Talk 15:43, 21 February 2007 (UTC)

Absolutely. I have no idea how to interpret the graphs, and I pretty much understand how a put option works. -B —Preceding unsigned comment added by 219.79.209.52 (talk) 15:34, 30 September 2008 (UTC)

I liked the graphs and found them very helpful in understanding how options work. Different people use different ways to learn. Can you please restore the graphs? 15 May 2009, Esoth

This paragraph seems to be wrong - please revisit,

The put buyer either believes that the underlying asset's price will fall by the exercise date or hopes to protect a long position in it. The advantage of buying a put over short selling the asset is that the option owner's risk of loss is limited to the premium payed for it, whereas the asset short seller's risk of loss is unlimited (its price can rise greatly, theoretically, infinitely, all the short seller's loss. The put buyer's prospect (risk) of gain is limited to the option's strike price less the underlying's spot price and the premium/fee paid for it.

Rgeards, Shitij Malik —Preceding unsigned comment added by 125.17.148.2 (talk) 06:01, 29 October 2009 (UTC)

Error

This article is mixing up the writer with the buyer in the first and second paragraphs. This is ridiculous.

-Sorry I had a test the next day and I was getting a bit worked up from the confusion :)

—I thought something wasn't right. "The put allows the buyer the right but not the obligation to sell" ... but later "The buyer has the obligation to purchase the underlying asset" Kevininspace 18:43, 6 March 2007 (UTC)

/* It is a bit confusing, but actually there are two things we are talking about here; the buyer and seller of the putoption and then the buyer and seller of the actual underlying stock itself */

• Possible Fundamental Error*

The underlying notion that the premium paid to the writer(seller) of the put contract is simply (current price - strike price)*(number of shares) is ludicrous.

In the example given, current price is $55 and the strike price is $50, so for a 100 share contract, $500 dollars is paid to the writer (his max potential profit, if the stock stays above $50 for the contract duration.)

However, if the strike price is lower, then the writer(seller) has less risk since a given stock is less likely to drop more significantly. And yet, the writer would be paid a higher premium? Higher premium for less risk?

Ex. $30 strike price instead of $50 would mean $55-30=$25, $25*100shares=$2500. So he would be paid $2000 more, yet the chance of the stock dropping below $30 is much much less.

Conversely, if the strike price were only $54, according the article the seller would be paid a mere $100, yet the chance of the stock dipping down a dollar or two is very high. Again, this makes no sense.

I believe to calculate the premium paid to the seller for a given puts contract is a very complex financial formula. I looked up puts after reading about them on a blog an hour ago, so I am new to this, but I am pretty sure the current calculation given for the premium is wrong. The blog has a real-world example in which a 100 share contract of a stock at $49 with a strike price of $45 is sold for $205, not $400 as this article would suggest. SamISmyth (talk) 06:23, 17 December 2009 (UTC)Sam

Additionally, the article has no mention of the importance of the duration of the put contract. A contract with a longer duration is of course more risky for the seller as the stock has a better chance of dipping below the strike price, and thus the seller will be paid a higher premium the longer the contract.SamISmyth (talk) 06:23, 17 December 2009 (UTC)Sam

Confused

The first paragraph left my very non-financial head spinning. I've noted the confusing points with asterisks:

"The put allows the *buyer* the right but not the obligation *to sell* a commodity or financial instrument (the underlying instrument) *to the ... (seller)* of the option at a certain time for a certain price (the strike price). The writer *(seller)* has the obligation to *purchase* the underlying asset at that strike price, if the buyer exercises the option."

Um, in the real world, buyers _buy_ and sellers _sell_. Here, the buyer is selling and the seller is buying. Was this a series of mistakes, or is finance-o-speak typically written backwards like this? If it is, wow!, talk about obfuscation. Thanks for clarifying this arcane process for us less market savvy types.Krumhorns (talk) 17:40, 29 January 2008 (UTC)

I see your confusion. Here's what it really means: The put allows the buyer (of the put) the right . . . to sell a commodity or financial instrument (the underlying instrument) to the seller (of the put) at a certain time for a certain price. The seller (of the put) has the obligation to buy the underlying asset. . .. That is, there are two separate assets we're talking about: (1) the put, and (2) the underlying asset (e.g. stock) on which the put is written. Both assets are being bought and sold, each for a different. The buyer of the put may end up selling the stock, and vice versa. Is that any clearer? Ronnotel (talk) 04:20, 30 January 2008 (UTC)

- Just dropping by to also say that this intro is extremely confusing...I would rewrite but I have no financial knowledge. And from reading this, I still have none :) —Preceding unsigned comment added by 88.108.160.79 (talk) 21:57, 3 July 2008 (UTC)

Try this for an intro paragraph

A "put" or "put option" is an option to sell an item at a preset price at some time in the future. That is it is a contract between two parties where one party (the buyer of the put) has the option, but not the obligation, to sell an item, typically a commodity or financial instrument such as a stock, to the other party (the seller of the put) at future date and at a predetermined price (the strike price) lower than the current market price. If the price of the specified item does not drop below the strike price within the time period specified by the contract neither party has any further obligation and the transaction is complete. If the price does drop below the strike price, the seller of the put has an obligation to buy the item from the other party at the strike price, so the seller or writer of the put has a maximum exposure set by the strike price should the market price of the item being optioned drop to zero.

Although neither party has to own the item being optioned at the time the contract is written, the prototypical case is where the buyer of the put does already own the item and wants to reduce their risk should its market price drop. Whereas the seller of the put does not own the object but is willing to accept future risk in exchange for immediate compensation. The perceived risk effectively determines the price of the put.

In this transaction, the buyer of the put is paying money upfront in order to reduce potential loss should the market price of the item drop. Therefore the buyer believes the market price will rise, but also recognizes a possibility that the price will drop and wants to set a floor on their future potential losses. The seller of the put is being paid to take on that risk should the market price drop and therefore they also beleive the price will rise but are able to tolerate more risk than the seller.

The existing article is pretty confusing. I tried to start simple and also explain motivations, but I will leave it to someone else to change the article. 69.125.146.118 (talk) 14:52, 3 April 2008 (UTC)

    I support this as the first paragraph.  This is much more clear to the average reader.  —Preceding unsigned comment added by Delectate (talk • contribs) 14:56, 9 October 2009 (UTC) 

dodgy example ??

The way I see it, saying that the option will cost the buyer $5 is misleading. If the strike price is $50 and the current price of the underlying instrument is $55 then the option would be pretty close to worthless, since the underlying has to fall a whole $5 before the buyer could begin to recoup anything. The only reason it would have any value at all is if the exercise date was a long way off in the future... so a realistic price in this scenario might be 50 cents or maybe a dollar or two if the stock was highly volatile. Suggesting that it is $5 (implication $55 - $50) is misleading, because it suggests the option price would rise if the underlying went to $60... which it wouldn't. I'm new to this and maybe I've just got confused, but that's what I thought when I read it.

12.51.82.42 (talk) 06:49, 21 December 2008 (UTC)

If you consider a LEAPS option the $5 time value is very reasonable in this scenario -- the high volatility and low interest rates we are seeing also add significant time value to put options. Joshuwaliu (talk) 17:22, 12 February 2009 (UTC)

Write a Put

I don't understand, why would anyone write a put? This article suggests that unless the stock price doesn't drop, the person who wrote the put loses money.207.81.230.48 (talk) 08:24, 24 December 2008 (UTC)

Right. Options give you a high probability of losing a little money and a low probability of gaining a lot of money. It's the same with a call option, just in a different direction. --Kalbasa (talk) 16:00, 24 December 2008 (UTC)

When you write a put, the amount of money you receive is the sum of intrinsic value and time value. You write a put when you do not believe the stock price will fall far enough that you will lose the time value, or if you believe the stock price will increase. Also, consider the situation where you write a deep-in-the-money put. In this case, the time value is relatively insignificant, so your gain/loss is equal to the gain/loss in the price of the underlying times some positive factor delta. In this case, delta will usually be greater than one, thus your portfolio closely mimics a leveraged long-position in the underlying. One benefit of achieving leverage by writing a deep-in-the-money put as opposed to borrowing on margin is that you are borrowing at approximately the risk-free rate. Joshuwaliu (talk) 17:17, 12 February 2009 (UTC)

Nothing wrong with the answers so far, per se, but they all kind of miss the point of the original question posed. Big institutions can write puts because they have the ability to hedge efficiently. The option premium they charge covers the expected cost of hedging plus a little extra (their expected profit). The existence of hedging strategies means the put seller doesn't have to worry about the upward or downward drift of the underlying's price. In fact, it's even better than that for these big guys...they are making so many trades that things tend to zero out and it takes less effort and money to hedge. --DudeOnTheStreet (talk) 09:51, 16 May 2011 (UTC)

Naked Puts (and indeed Naked "any investment")

I would disagree with folding the section on "Naked Puts" into the "Put Options" page. Of course the two should be linked, but whereas the underlying concept is the same, the ethical aspect is not. Selling what you do not have may have been fine during the previous decade's tumultuous, but rising, market. However, with the advent of this recent global financial crisis, chinks in the armor of the financial system have begun to show. One of those faults has been the growing inability for unsophisticated investors who have overextended themselves to meet their obligations, as well as the increasingly apparent problem of the very complex web of trades that are not formally registered with any sort of clearing authority. The latter problem is supposedly being dealt with, in the U.S. at least, but as the markets begin to move away from the heady days of selling air, especially under the growing influence of Islamic finance, "naked" anything should be treated as an entirely separate asset class, away from the long-accepted ones where one of the parties actually possesses what asset is underlying the derivative contract. - B.C.

P.S. the very example in the "Put Options" page is uncovered, as, "'Trader A' can exercise the put by buying 100 shares for $4,000 from the stock market, then selling them to 'Trader B' for $5,000" This should be changed to an example in which the buyer already has the position. —Preceding unsigned comment added by Bryce combs (talk • contribs) 05:28, 16 March 2009 (UTC)

Without taking a position on the ethical aspect, I want to point out that such is not an editorial judgment to make on merging the articles. If there is relevant commentary on the ethics of option investing in secondary sources, it should be cited in the article. I support the merge. In fact, I can't see how the two articles were not merged long ago. patsw (talk) 15:00, 20 March 2009 (UTC

Sorry not to have gotten back to this sooner, but my work schedule does not permit me to do much. Allow me to explain what I mean by an ethical issue. We would not very well combine the "investment" and "gambling" pages would we? Even though there are clearly elements of gambling in investment, and vice versa, we still hold, as a society, to the idea that investment involves the provision of capital by investors to the business community in hopes of developing some sort of viable operation that would contribute to the economy. Yes, modern punters, on the whole, look more at how the market moves than how they can participate in profiting from the market's development; and, statistically, one has about the same chance of selecting winners by tossing a dart as through complex modeling. Business ethics is a course taught in every business school today, though few seem to adhere to the principles they learn. Selling something one does not have, and could not guarantee he would be able to lay hands on, is fraud. At the very least such an action, as demonstrated in the recent VW-Porsche debacle, might be considered malpractice on the part of the professionals who are supposed to be acting on our behalf. If we begin to blur the lines of distinction between investment and gambling, then “Wall Street” and “Las Vegas” might as well be merged. - B.C.

Short position

In the introduction it is written: "The buyer acquires a short position by purchasing the right to sell the underlying instrument to the seller of the option", which is wrong. Taking a short position in general means selling an option, not, as stated above, buying an option. For the sentence to be true, "short" should be replaced by "long". It can be checked here: http://www.investopedia.com/terms/s/short.asp or in "Options, Futures and Other Derivative Securities" by John C. Hull (2nd edition), page 7. --P4VV (talk) 12:46, 1 November 2010 (UTC)

Old intro paragraph

A put option (usually just called a "put") is a derivative financial instrument that establishes a contract between two parties concerning the buying/selling of an asset at a reference price. The buyer of the put option acquires a short position by purchasing the right to buy the underlying instrument from the seller of the option for a specified price (the strike price) during a specified period of time. If the option buyer exercises his right, the seller is obligated to sell the underlying instrument to him at the agreed-upon strike price, regardless of the current market price. In exchange for having this option, the buyer pays the seller or option writer a fee (the option premium).

Put options offer insurance against excessive loss by providing a guaranteed buyer and price for an underlying instrument. In addition, the seller of put options can profit by selling put options that are not utilised. Such is the case when the ongoing market value of the underlying instrument makes the option useless, usually when the current market price of the underlying instrument remains above the strike price. Holders of put options may also profit from the potential to sell the underlying instrument at a price greater than current market value and could then repurchase the underlying instrument at the reduced price to gain a profit. — Preceding unsigned comment added by Alpesh24 (talk • contribs) 19:46, 22 March 2011 (UTC)

Graphs (again)

I find the graphs of poor quality. They do not show the intersection of the payoff function with the vertical axis, which is important to see in order to see the limited upside (in the case of a buyer) or limited downside (in the case of a seller). In addition, I really don't get the funny jagged bumps. What is the point of them? --DudeOnTheStreet (talk) 03:36, 26 April 2011 (UTC)

multiplier

I thing when talking about the payoff it is necessary to include the multiplier!! The payoff as it is currently treated in the article has to be multiplied by this multiplier. Have a look at this site http://daytrading.about.com/od/options/a/Warrants.htm --92.192.7.128 (talk) 13:18, 1 August 2013 (UTC)

First few paragraphs mixing up buyer/seller?

Is it just me or are there a few instances in the first few paragraphs where “buyer of a put” and “seller of a put” are conflated with which party is obligated to buy the underlying asset? I think this could really use an expert weighing in to really simplify things. (99.203.1.84 (talk) 18:35, 4 April 2020 (UTC))

American vs European type options

There is a need for a paragraph to write the differences between American and European type options (call/put). The American type options are redeemable at any time till maturity, while European type options are not. AzureDrake92 (talk) 23:48, 1 July 2023 (UTC)

See the first line of the 'Instrument models' section. MrOllie (talk) 23:59, 1 July 2023 (UTC)