What are Put Options

A put option contract is one in which the seller (writer) gives the buyer of the option the right to sell the underlying asset, at a predetermined rate at a future date. The buyer of the put option has the right to sell an agreed quantity of a particular commodity or financial instrument to the seller of the option at a future date for a particular price. The buyer of the put option has to pay premium.

The loss of buyer in put option is limited to the extent of premium paid by him and profit is unlimited, while the loss of writer is unlimited in put option and profit is limited to the amount of premium he has received from the buyer of the option. The buyer of put option believes that price of the underlying instrument will decline and he will make profit while seller of the option believes that price of underlying instrument will increase and put option will expire therefore he will take the premium and hence make the profit.

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