A put option can be defined as a contract that provides the option holder the right, but not the obligation, to sell, or sell short, a predefined amount of an underlying stock at a predetermined price within a predetermined period of time.
The predetermined price the put option buyer can sell at is called the strike price.
Put options are exchanged on different underlying securities, that include stocks, currencies, bonds, commodities, futures, and indices.
A put option can be compared with a call option, which provides the option owner the right to buy the underlying security at a predetermined price on or before option expiry.
They are critical to understanding while picking whether to play out a straddle or a strangle.
A put option turns out to be increasingly valuable as the price of the underlying security falls.
On the other hand, a put option loses its value as the price of the underlying security rises.
Since put options, when exercised, give a short position in the underlying security, they are utilized for hedging purposes or to speculate on downside price movement.
A lot of times, investors utilize put option contracts in a risk-management option strategy referred to as a protective put.
This strategy is utilized as a type of investment protection to make sure that losses in the underlying security do not surpass a specific amount, particularly the strike price.