What are Put Options?
Put options gives the option owner the right, but not the obligation, to sell the underlying assets against the premium paid at a given strike rate for the given maturity. In the case of a put option, the call option only buys the security if the current market price is lower than the strike price.
Why is Put Options important?
The payoff of a call option is given as the following:
P = Max (0, X – ST)
where, P is the put option payoff
ST is the current stock price
X is the strike price
Let’s take an example of a stock currently trading at USD 25. Let’s assume a buyer purchase a call option with a month’s maturity and a strike price of USD 20. If the price reaches USD 18 in a month, the payoff would be:
C = Max (0, X – ST) = Max (0, 20 -18) = 2