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.

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.

Most Popular

Best debit and credit cards to use while travelling abroad
Personal finance

Best debit and credit cards to use while travelling abroad

If you’re going on holiday or travel abroad regularly, it’s worth knowing what the best card is to avoid hefty fees. We weigh up the charges and any p…
6 Jun 2023
Nationwide to give £100 cash boost to customers
Personal finance

Nationwide to give £100 cash boost to customers

Nationwide Building Society is giving customers £100 as it reinvests profits. Dubbed the Nationwide Fairer Share scheme, we look at who is eligible.
22 May 2023
A discounted REIT to buy now
Investments

A discounted REIT to buy now

This real estate investment trust is carving out a niche for itself by recycling old offices. Investors should take advantage of the discount and buy …
6 Jun 2023