Put Option

A put option is just the opposite of a call option. A put option gives the holder the right but not the obligation to sell securities (i.e. to put them) on or by a certain date at a fixed exercise price, In other words, the seller/writer of the put option has the obligation to buy securities in case the put owner decides to exercise his option. Since the put option writer is at the receiving end, he receives the put premium (as a compensation for risk assumed) from the put buyer.

The put option holder will exercise his right to sell the securities should the price of the securities fall below the exercise price (E) at the date of expiration. In case S1 > E, he will prefer to sell at a higher price in the market than to sell to the put option writer.

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