A financial instrument that gives the owner of the put option the contractual right to sell an underlying security at a pre-determined price within a pre-specified timeframe. The underlying securities, which a put option owner has a future right to sell, may include stock, currencies, bonds, commodities, or index funds. Strategically, the owner of a put option is anticipating that the price of the security will decrease in the put option’s timeframe, and the owner can then compel the other party to purchase the underlying security at a price above market value. Thus, the more value that the underlying security loses, the more valuable the put option. The party who has the obligation to purchase the put option owner’s underlying security holds a call option. An owner of a put option may exercise the option when the underlying security drops below the pre-determined price, and any additional amount to make up for the cost of the put option contract. The SEC provides a sample put option contract to illustrate how such a contractual agreement may operate.
[Last updated in September of 2020 by the Wex Definitions Team]