Put option
Put option is right to sell and
exercise where the exercise price is lower than market price otherwise it is
preferred to lapse the option. Because you can exercise put option (sell) at
higher price and then can make purchases the same share at lower market price.
Example of put option
|
Put option
|
1000
Shares
|
|
Premium
|
$ 200
|
|
Exercise Price
|
$ 5
|
|
Current Price
|
$ 6
|
|
Future market
Price
|
$ 4
|
Solution
Put option (Right to sell) is used when you expecting future
down fall of prices.
|
Put option - Sale proceeds (1000 x 5)
|
$ 5,000
|
|
Open market
purchase ( 1000 x 4)
|
$ 4,000
|
|
Profit before
Premium
|
$ 1,000
|
|
Profit after
premium ( 1000 – 200)
|
$ 800
|
