A put option gives the buyer of the option the right to sell the underlying asset at a fixed price at any time prior to the expiration date
of the option. The buyer pays a price for this right.

At expiration,
* If the value of the underlying asset (S) < Strike Price(K)
** -> Buyer makes the difference: K-S
* If the value of the underlying asset (S) > Strike Price (K)
** -> Buyer does not exercise

More generally,
* The value of a put decreases as the value of the underlying asset increases
* The value of a put increases as the value of the underlying asset decreases

A [[Pay-off Diagram]] for a ''buyer'' of put option looks like this: you start out with a loss and gain profit if the actual share price becomes lower than the strikeprice. Buying a put option buys you protection against lower stock prices.

<html>
<div id="jxgbox3" class="jxgbox" style="height:300px; width:400px;"></div>
</html>javascript:;

<script>
var board = JXG.JSXGraph.initBoard('jxgbox3', {boundingbox: [-40,  150, 300, -150], keepaspectratio:true, axis:true});

var strikepriceslider = board.create('slider', [[0,0],[300,0], [0.0,100, 300]], {name:'strikeprice'}, {withLabel: false});
var putpriceslider = board.create('slider', [[0,0],[0,-300], [0.0,-100, -300]], {name:'callprice write'}, {withLabel: false});

var strikepriceline= board.create('line', [[function(){return strikepriceslider.X()}, function(){return -150}],[function(){return strikepriceslider.X()},function (){return 200}]],{'strokeColor':'red', 'dash':'true'});

var writingputoptionarrow1 = board.create('arrow', [[function(){return strikepriceslider.X()+200}, function(){return putpriceslider.Y()}],[function(){return strikepriceslider.X()},function (){return putpriceslider.Y()}]],{'strokeColor':'yellow'});
var writingoptionarrow2 = board.create('arrow', [[function(){return strikepriceslider.X()}, function(){return putpriceslider.Y()}],[function(){return strikepriceslider.X()-200},function (){return putpriceslider.Y()+200}]],{'strokeColor':'yellow'});

</script>

A [[Pay-off Diagram]] for a ''seller'' of put option ('writing' a put') looks like this. In the interactive diagram below, the purple line represents the put for the seller:

<html>
<div id="jxgbox4" class="jxgbox" style="height:300px; width:400px;"></div>
</html>

<script>
var board = JXG.JSXGraph.initBoard('jxgbox4', {boundingbox: [-40,  150, 300, -150], keepaspectratio:true, axis:true});

var strikepriceslider = board.create('slider', [[0,0],[300,0], [0.0,100, 300]], {name:'strikeprice'}, {withLabel: false});
var writeputpriceslider = board.create('slider', [[0,0],[0,300], [0.0,100, 300]], {name:'callprice write'}, {withLabel: false});

var strikepriceline= board.create('line', [[function(){return strikepriceslider.X()}, function(){return -150}],[function(){return strikepriceslider.X()},function (){return 200}]],{'strokeColor':'red', 'dash':'true'});

var putoptionarrow1 = board.create('arrow', [[function(){return strikepriceslider.X()+200}, function(){return writeputpriceslider.Y()}],[function(){return strikepriceslider.X()},function (){return writeputpriceslider.Y()}]],{'strokeColor':'purple'});
var putoptionarrow2 = board.create('arrow', [[function(){return strikepriceslider.X()}, function(){return writeputpriceslider.Y()}],[function(){return strikepriceslider.X()-200},function (){return writeputpriceslider.Y()-200}]],{'strokeColor':'purple'});

</script>

bag
finance_public
created
Sat, 14 Jan 2012 18:01:53 GMT
creator
dirkjan
modified
Sat, 14 Jan 2012 18:01:53 GMT
modifier
dirkjan
tags
M13
Term
creator
dirkjan