Put option

A put option gives someone the right to sell something (often shares, but they can be used in connection with other financial assets) for an agreed price on or before a certain date.

Options give you the right to buy or sell something (often shares, but they can be used in connection with other financial assets) for an agreed price on or before a certain date.A put option gives someone the right to sell a share.

In order to have the option to buy or sell something, you have to pay a fee known as a premium to the seller of the option (who is known as the option writer). You might buy a put option if you thought that a share was likely to fall in price and you wanted to profit from that happening.

Advertisement - Article continues below

Another way to use put options is to hedge your portfolio against a drop in the market. For example, fund managers often buy put options on a stockmarket index to protect their portfolio so that if the stockmarket falls, the profits on the option will offset the losses on the shares in the portfolio.

In the UK, options contracts are sold in blocks of 1,000 shares. Say XYZ plc is trading at 100p per share and a put option, giving the right to sell at 90p, costs a premium of 5p. The cost of the option is £50 (5p x 1,000). If the shares fall to 70p, you would make a profit of £150 ((90p-70p-5p) x 1,000).

If the shares go up, you let the option expire, and you lose your entire premium paid of £50.





A bond is a type of IOU issued by a government, local authority or company to raise money.
19 May 2020

Quantitative investing

Quantitative investing uses sophisticated computer-based mathematical models to identify and carry out trades.
8 May 2020

Quantitative easing (QE)

Quantitative easing (QE) involves electronically expanding a central bank's balance sheet.
8 May 2020

Emerging markets

An emerging market is an economy that is becoming wealthier and more advanced, but is not yet classed as "developed".
24 Jan 2020

Most Popular


As full lockdown ends, what are the risks for investors?

In the UK and elsewhere, people are gradually being let off the leash as the lockdown begins to end. John Stepek looks at what risks remain for invest…
29 May 2020
Global Economy

The MoneyWeek Podcast: James Ferguson on the virus, the lockdown, and what comes next

Merryn talks to MoneyWeek regular James Ferguson of Macrostrategy Partnership about what's happened so far with the virus; whether the lockdown was th…
28 May 2020

Can the UK housing market escape a slump?

The Bank of England is predicting a 16% slump in house prices.
29 May 2020