Put option
A put option gives its holder the right, but not the obligation, to sell an underlying asset at a fixed strike price on or before expiry, with payoff max(strike price − spot price, 0) — insurance against a price fall.
See it move
An investor buys a put option with an €80 strike, paying a €5 premium. If the share falls to €68, the payoff is €80 − €68 = €12 and net profit is €12 − €5 = €7 per share. If the price stays above €80 the option lapses and the loss is capped at the €5 premium. Breakeven is €75.
The formula
Variables
- Strike (exercise) price (€)
- Spot price at expiry (€)
The gross amount a put holder receives at expiry, before subtracting the premium originally paid for the option.
Check yourself
An investor buys a put option on a share with a strike price of €95, paying a premium of €6. At expiry the share is trading at €70. What is the investor's net profit per share?