Updated Feb 09, 2022

What is Put (PE) ?

What is Put?

A put option is a contract that gives the holder the ability (but not the responsibility) to purchase an asset at an agreed sum, which is called the striking price. These companies reckon that the valuation will decrease by purchasing a put option. The more profitable the option contract gets with a declination of actual stock value, the more attractive it becomes.

Possibilities on put options can be exchanged on a range of items, such as equities and cryptocurrencies. There are two types of options: put and call. Put options are those that allow you to sell an asset class for less than what you paid for it at the time of the option agreement's termination.

Working of Put Option

To purchase an option, the client must pay what is known as a premium. The potential purchaser's total cost is equal to the premium. This is because options have a specified expiry date. Put options are useless if they are not exchanged or executed by their expiry date. In addition to common equities and ETFs, silver and other precious metals also have options accessible to investors.

The worth of put options increases as the value of the commodity stock drops, and they decline in price when the revenue of the underlying stock increases. As the time limit advances, the price of a put option may also decline.

Inherent value is used to determine an option's viability. It is possible to compute a put option's inherent value by deducting its strike value from its market value.

Factors Affecting the Price of a Put

Term depreciation diminishes the price of a put option as it nears its expiration date in most cases. As an option's deadline approaches, time depreciation intensifies since there is very little time to benefit the investment. The discrepancy seen between market price and the actual share value is equal to the inherent worth of an option.

Put options that expire have no inherent value as executing the option seems to have no advantage. As a result, traders can briefly sell the shares instead of executing theirs outside the money put options at a lower price. Short selling is riskier than purchasing put options in a market crash.

Buying put options

Put options seem more complicated than simply reselling equities or asset classes. Throughout many circumstances, buyers are expected to submit and be accepted before buying options through trading business. Relying on the trading firm, you'll be asked to fill in a form to determine your level of expertise and risk management.

Your yearly salary and net wealth may also be requested. Membership for particular options trading methods is typically granted within a few working days. You can purchase put options in your account if it is permitted. There are five option trading levels;

Example of put option

Suppose, after some investigation, you've concluded that XYZ Firm's stocks will drop beneath 1000 INR per unit, which is the recent market price of our fictitious firm. You can now trade 1000 securities of 10000 INR per unit by obtaining a 50 INR put option.

It's possible to gain 1,50,00 INR by selling 1000 shares of XYZ stock at 1000 INR per unit if the shares decline to 800 INR. Divided by 1000 units, that's the 200 INR profit excluding the 50 INR premium on the option.

The technique of selling a put option to some other bidder is much more widely called options trading if you do not already have 100 shares of the company.

"ITM" (in our case, 1000 INR) refers to an option that is selling above its market price, which means that the option buyer stands to make money. When a commodity is out of the money (OTM), it means that the commodity's present value is above the strike price. The option is presently worthless as long as the price doesn't rise above 1000 INR. Even more important than the currency's present price, you have a put option that can be "at-the-money" (ATM).

Conclusion

There are put options that allow owners the ability, but not the responsibility, to purchase a specific quantity of an asset at a specific price over an agreed period. Equities, indices, commodities, and cryptocurrencies can all be traded with put options.

When the value of the underlying commodity fluctuates, the option strike price, temporal degradation, bond yields, and fluctuation all affect the price of the put option. A reduction in interest rates and a rise in unpredictability in the asset value price all work together to boost the value of put options. Due to rising interest rates, decreasing instability, and expiry date nearing the put option's value deteriorates, resulting in a drop in its worth.