Chapter 3

29 September 2020 02:14 PM

Characteristics of a put option are as follows:

■ The two counterparties to a put option are the long put and the short put.
■ The price at which the long put has the right to sell the asset is known as the strike price or exercise price.
■ A put option gives the long put the right, but not the obligation, to sell an underlying asset to the short put
in the future. Hence, the long put can choose in the future whether or not to exercise its right to sell.
■ The short put is obligated to purchase the underlying asset from the long put should the long put exercise
its right to sell.
■ The long put is also referred to as the “buyer” of the put option. The short put is also referred to as the
“writer” or “seller” of the put option.
■ The long put must pay a fee to the short put for providing the right. The fee is known as the “put
premium.” The put premium is paid at initiation. Other names for the put premium are the “put price” or
simply the “premium.”
■ A European-style put option provides the long put the right to exercise only at expiration. An American-style
put option provides the right to exercise either at expiration or before expiration. Both American-style and
European-style put options trade in the United States.
■ Put options trade both OTC and through exchanges.

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An equation that describes the payoff to the long put is:

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The short put’s payoff at expiration can be expressed as:

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