What is a Put Price?

Mary McMahon
Mary McMahon

A put price is an agreed-upon price for which the holder of a put option can sell the subject of the option at any time before the option's expiry date. Put simply, it is a guaranteed sales price. People purchase put options when they wish to take a short position which will allow them to profit from a security's decline in value because they can buy the security at the low price and turn around and resell it to the contract writer at the put price. If the put price is not exercised, the option expires and the holder of the option loses the right to sell at that price and is out the cost of the option.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

Options contracts can be written for a variety of securities. In the opposite of a put option, known as a call option, the holder of the option has the right to buy a security at a set price from the writer. In this case, the contract holder is hoping that the value of the security will increase, allowing the holder to buy at a low price and resell at a high one for a profit.

The put price may also be known as the exercise or strike price. In some contracts, the holder of the contract can exercise the put price at any time while the contract is valid. In other cases, there may be a smaller window. The contract can also specify the number of units covered by the contract. The price of the put option can vary depending on the security involved and the specifics of the agreement between the buyer of the contract and the writer.

Working with options can become complicated. If an option expires without being exercised, the buyer has lost the cost of the contract and potentially missed an opportunity to use that money more effectively elsewhere. People who buy and trade options contracts must be careful because it is possible to make very bad purchasing decisions, and even people who are good at predicting the movements of the market can find themselves on the wrong side of a deal.

People who write options contracts are also taking a risk. Someone writing a contract with a specific put price takes the risk of being obligated to buy the security at that price, potentially taking a loss if the value of the security has fallen dramatically. Both sides of the contract are essentially betting against each other, and one or the other will lose when the contract expires. A great deal of research is conducted to avoid making costly mistakes when buying or writing options.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a wiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

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