A put is an option contract which gives the owner the right to sell the underlying instrument at a designated price on or before a specified date.
A put option is in-the-money (ITM) when the strike price is above the current stock price. A put option is out-of-the-money (OTM) when the strike price is below the current stock price. A put option is at-the-money (ATM) when the strike price is equivalent to or near the current stock price.
Put buyers – When buying a put, the total risk is the amount which is paid for the option. Put buyers have the right to sell the underlying stock at the designated strike price until the expiration date. Exercising long put options is a choice to sell the underlying stock at the strike price.
Put sellers – Put sellers have the obligation to purchase the underlying stock at the strike price if the buyer of the put chooses to exercise the option. Selling a put collects premium but also commits to buying the underlying stock if prices fall beneath the strike price by expiration. To offset a short put position, equivalent stock must be sold short, or the put can simply be bought back by the expiration date.
Intrinsic value – A put option has intrinsic value if the current price of the underlying stock can be subtracted from the strike price. Intrinsic value is the amount by which an option contract is in-the-money.
Extrinsic value – A put option has extrinsic value if the intrinsic value can be subtracted from the total put premium. Extrinsic value is also known as time value.
Return to the main options glossary page to learn more terms.
