Definition of "Put option"
Right to sell a given security at a stipulated price until a future expiration date. For example, assume the "None-Do-Well" company's stock has a market value of $20. Investor A sells Investor B an option (right) to buy Investor A's shares in the "None-Do-Well" company at a price of $25, good until 60 days hence. Investor B pays a premium of $4 per share for this right. If the stock's market value increases to a price greater than $29, Investor B will make a profit on the transaction. If, however, the stock falls below its original price of $20, Investor A will keep the stock as well as the $4 premium right per share it received from Investor B. If the 60-day limit expires without the right being executed, the option becomes void and worthless.
Have a question or comment? We're here to help.