Put option
Capital MarketsThe right, and not the obligation, to sell something at a fixed price up to an agreed date.
Also written: put, puts, put options
A put is the mirror of a call. The holder may sell the underlying at the strike price, so they exercise only when the underlying is worth less than the strike, and the payoff is the strike less the underlying price when that is positive and zero otherwise.
Because the payoff is floored at zero in the same way, volatility raises the value of a put exactly as it raises the value of a call. A put also gains value as the strike rises and as expected dividends rise, and loses value as the risk free rate rises, which is the opposite of the call on both of the last two.
The instrument a candidate is most likely to meet is the change of control put in a bond indenture, which requires the issuer to offer to repurchase the notes if the company is taken over. That is a put held by the bondholder, and it is one of the first things a bidder's adviser checks, because it can turn an acquired company's cheap legacy debt into an immediate refinancing obligation.
Buying a put against a position held is the cleanest way to describe insurance in financial terms. The buyer keeps the upside and pays a premium to cap the downside, which is exactly the shape an insurance contract has.
Worked example
A holder owns a share at €20.00 and buys a put struck at €18.00 for €1.00.
If the share falls to €12.00 the put pays €6.00, so the position is worth €18.00 against the €1.00 premium spent. If the share rises to €30.00 the put expires worthless and the holder keeps the gain less the €1.00.
The premium bought a floor. That is the same trade a bondholder makes when they take a change of control put instead of a higher coupon.