Put Option

A put option is a contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a pre-determined price within a specified time frame. The specified price the put option buyer can sell at is called the strike price. A put buyer profits when the underlying asset decreases in price.  When an option to sell stock is purchased, the option contract gives the buyer the right to sell 100 shares at the strike price.

For example, an option trader owns 100 shares of Tesla ($TSLA), but is worried about the stock dropping.  The trader buys a put option at a $350 strike price while Tesla is worth $355 per share.  After purchasing the put, the value of Tesla goes down to $340. The put option holder can either sell 100 shares of Tesla for the $350 strike price instead of the actual stock price of $340,  or sell the option for the increase in value of the contract before it expires or is exercised.

If the buyer does not already own 100 shares of Tesla, or does not wish to liquidate 100 shares of Tesla, the option trade should be closed before expiration.

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