Definition of Put option

Put option

This security gives investors the right to sell (or put) fixed number of shares at a fixed price within
a given time frame. An investor, for example, might wish to have the right to sell shares of a stock at a certain
price by a certain time in order to protect, or hedge, an existing investment.

Put Option

A contract that gives the holder the right to sell an asset for a
specified price on or before a given expiration (maturity) date

put option

Right to sell an asset at a specified exercise price on or before the exercise date.

Put Option

Contract that grants the right to sell at a specified price at some time in the future.

Put an option

To exercise a put option.

Bull spread

A spread strategy in which an investor buys an out-of-the-money put option, financing it by
selling an out-of-the money call option on the same underlying.

Covered Put

A put option position in which the option writer also is short the corresponding stock or has
deposited, in a cash account, cash or cash equivalents equal to the exercise of the option. This limits the
option writer's risk because money or stock is already set aside. In the event that the holder of the put option
decides to exercise the option, the writer's risk is more limited than it would be on an uncovered or naked put
option.

Dynamic hedging

A strategy that involves rebalancing hedge positions as market conditions change; a
strategy that seeks to insure the value of a portfolio using a synthetic put option.

Hedging

A strategy designed to reduce investment risk using call options, put options, short selling, or futures
contracts. A hedge can help lock in existing profits. Its purpose is to reduce the volatility of a portfolio, by
reducing the risk of loss.

Index option

A call or put option based on a stock market index.

In-the-money

A put option that has a strike price higher than the underlying futures price, or a call option
with a strike price lower than the underlying futures price. For example, if the March COMEX silver futures
contract is trading at $6 an ounce, a March call with a strike price of $5.50 would be considered in-the-money
by $0.50 an ounce.
Related: put.

Naked option strategies

An unhedged strategy making exclusive use of one of the following: Long call
strategy (buying call options ), short call strategy (selling or writing call options), Long put strategy (buying
put options ), and short put strategy (selling or writing put options). By themselves, these positions are called
naked strategies because they do not involve an offsetting or risk-reducing position in another option or the
underlying security.
Related: covered option strategies.

Option

Gives the buyer the right, but not the obligation, to buy or sell an asset at a set price on or before a
given date. Investors, not companies, issue options. Investors who purchase call options bet the stock will be
worth more than the price set by the option (the strike price), plus the price they paid for the option itself.
Buyers of put options bet the stock's price will go down below the price set by the option. An option is part of
a class of securities called derivatives, so named because these securities derive their value from the worth of
an underlying investment.

Out-of-the-money option

A call option is out-of-the-money if the strike price is greater than the market price
of the underlying security. A put option is out-of-the-money if the strike price is less than the market price of
the underlying security.

Protective put buying strategy

A strategy that involves buying a put option on the underlying security that is
held in a portfolio. Related: Hedge option strategies

Put price

The price at which the asset will be sold if a put option is exercised. Also called the strike or
exercise price of a put option.

Uncovered put

A short put option position in which the writer does not have a corresponding short stock
position or has not deposited, in a cash account, cash or cash equivalents equal to the exercise value of the
put. Also called "naked" puts, the writer has pledged to buy the stock at a certain price if the buyer of the
options chooses to exercise it. The nature of uncovered options means the writer's risk is unlimited.

Option

See call option and put option

Puttable bond

A bond that allows the holder to redeem the bond at a
predetermined price at specified future dates. The bond contains an embedded
put option; i.e., the holder has bought a put option. See Callable bond.

Spread

For options, a combination of call or put options on the same stock
with differing exercise prices or maturity dates.

Abandonment option

The option of terminating an investment earlier than originally planned.

American option

An option that may be exercised at any time up to and including the expiration date.
Related: European option

American-style option

An option contract that can be exercised at any time between the date of purchase and
the expiration date. Most exchange-traded options are American style.

Arbitrage-free option-pricing models

Yield curve option-pricing models.

Asian option

option based on the average price of the asset during the life of the option.

Bargain-purchase-price option

Gives the lessee the option to purchase the asset at a price below fair market
value when the lease expires.

Barrier options

Contracts with trigger points that, when crossed, automatically generate buying or selling of
other options. These are very exotic options.

Basket options

Packages that involve the exchange of more than two currencies against a base currency at
expiration. The basket option buyer purchases the right, but not the obligation, to receive designated
currencies in exchange for a base currency, either at the prevailing spot market rate or at a prearranged rate of
exchange. A basket option is generally used by multinational corporations with multicurrency cash flows
since it is generally cheaper to buy an option on a basket of currencies than to buy individual options on each
of the currencies that make up the basket.

Binomial option pricing model

An option pricing model in which the underlying asset can take on only two
possible, discrete values in the next time period for each value that it can take on in the preceding time period.

Black-Scholes option-pricing model

A model for pricing call options based on arbitrage arguments that uses
the stock price, the exercise price, the risk-free interest rate, the time to expiration, and the standard deviation
of the stock return.

Call an option

To exercise a call option.

Call option

An option contract that gives its holder the right (but not the obligation) to purchase a specified
number of shares of the underlying stock at the given strike price, on or before the expiration date of the
contract.
Call premium
Premium in price above the par value of a bond or share of preferred stock that must be paid to
holders to redeem the bond or share of preferred stock before its scheduled maturity date.

Compound option

option on an option.

Covered or hedge option strategies

Strategies that involve a position in an option as well as a position in the
underlying stock, designed so that one position will help offset any unfavorable price movement in the other,
including covered call writing and protective put buying. Related: naked strategies

Currency option

An option to buy or sell a foreign currency.

Dealer options

Over-the-counter options, such as those offered by government and mortgage-backed
securities dealers.

Delivery options

The options available to the seller of an interest rate futures contract, including the quality
option, the timing option, and the wild card option. Delivery options make the buyer uncertain of which
Treasury Bond will be delivered or when it will be delivered.

Doubling option

A sinking fund provision that may allow repurchase of twice the required number of bonds
at the sinking fund call price.

Down-and-in option

Barrier option that comes into existence if asset price hits a barrier.

Down-and-out option

Barrier option that expires if asset price hits a barrier.

Elasticity of an option

Percentage change in the value of an option given a 1% change in the value of the
option's underlying stock.

Embedded option

An option that is part of the structure of a bond that provides either the bondholder or
issuer the right to take some action against the other party, as opposed to a bare option, which trades
separately from any underlying security.

Equity options

Securities that give the holder the right to buy or sell a specified number of shares of stock, at
a specified price for a certain (limited) time period. Typically one option equals 100 shares of stock.

European option

option that may be exercised only at the expiration date. Related: american option.

European-style option

An option contract that can only be exercised on the expiration date.

Exercising the option

The act buying or selling the underlying asset via the option contract.

Foreign currency option

An option that conveys the right to buy or sell a specified amount of foreign
currency at a specified price within a specified time period.

Futures option

An option on a futures contract. Related: options on physicals.

Garmen-Kohlhagen option pricing model

A widely used model for pricing foreign currency options.

Greenshoe option

option that allows the underwriter for a new issue to buy and resell additional shares.

Imputation tax system

Arrangement by which investors who receive a dividend also receive a tax credit for
corporate taxes that the firm has paid.

Index and Option Market (IOM)

A division of the CME established in 1982 for trading stock index
products and options. Related: Chicago Mercantile Exchange (CME).

Input-output tables

Tables that indicate how much each industry requires of the production of each other
industry in order to produce each dollar of its own output.

Intrinsic value of an option

The amount by which an option is in-the-money. An option which is not in-themoney
has no intrinsic value. Related: in-the-money.

Irrational call option

The implied call imbedded in the MBS. Identified as irrational because the call is
sometimes not exercised when it is in the money (interest rates are below the threshold to refinance).
Sometimes exercised when not in the money (home sold without regard to the relative level of interest rates).

Liquid yield option note (LYON)

Zero-coupon, callable, putable, convertible bond invented by Merrill

Lookback option

An option that allows the buyer to choose as the option strike price any price of the
underlying asset that has occurred during the life of the option. If a call, the buyer will choose the minimal
price, whereas if a put, the buyer will choose the maximum price. This option will always be in the money.

Liquid yield option note (LYON)

Zero-coupon, callable, putable, convertible bond invented by Merrill Lynch & Co.

Margin requirement (Options)

The amount of cash an uncovered (naked) option writer is required to
deposit and maintain to cover his daily position valuation and reasonably foreseeable intra-day price changes.

Multi-option financing facility

A syndicated confirmed credit line with attached options.

Option elasticity

The percentage increase in an option's value given a 1% change in the value of the
underlying security.

Option not to deliver

In the mortgage pipeline, an additional hedge placed in tandem with the forward or
substitute sale.

Option premium

The option price.

Option price

Also called the option premium, the price paid by the buyer of the options contract for the right
to buy or sell a security at a specified price in the future.

Option seller

Also called the option writer , the party who grants a right to trade a security at a given price in
the future.

Option writer

option seller.

Option-adjusted spread (OAS)

1) The spread over an issuer's spot rate curve, developed as a measure of
the yield spread that can be used to convert dollar differences between theoretical value and market price.
2) The cost of the implied call embedded in a MBS, defined as additional basis-yield spread. When added to the
base yield spread of an MBS without an operative call produces the option-adjusted spread.

Options contract

A contract that, in exchange for the option price, gives the option buyer the right, but not
the obligation, to buy (or sell) a financial asset at the exercise price from (or to) the option seller within a
specified time period, or on a specified date (expiration date).

Options contract multiple

A constant, set at $100, which when multiplied by the cash index value gives the
dollar value of the stock index underlying an option. That is, dollar value of the underlying stock index = cash
index value x $100 (the options contract multiple).

Options on physicals

Interest rate options written on fixed-income securities, as opposed to those written on
interest rate futures contracts.

Path dependent option

An option whose value depends on the sequence of prices of the underlying asset
rather than just the final price of the asset.

Poison put

A covenant allowing the bondholder to demand repayment in the event of a hostile merger.

Postponement option

The option of postponing a project without eliminating the possibility of undertaking it.

Put

An option granting the right to sell the underlying futures contract. Opposite of a call.

Put bond

A bond that the holder may choose either to exchange for par value at some date or to extend for a
given number of years.

Put provision

Gives the holder of a floating-rate bond the right to redeem his note at par on the coupon
payment date.

Put swaption

A financial tool in which the buyer has the right, or option, to enter into a swap as a floatingrate
payer. The writer of the swaption therefore becomes the floating-rate receiver/fixed-rate payer.

Put-call parity relationship

The relationship between the price of a put and the price of a call on the same
underlying security with the same expiration date, which prevents arbitrage opportunities. Holding the stock
and buying a put will deliver the exact payoff as buying one call and investing the present value (PV) of the
exercise price. The call value equals C=S+P-PV(k).

Quality option

Also called the swap option, the seller's choice of deliverables in Treasury Bond and Treasury
note futures contract. Related: cheapest to deliver issue

Split-fee option

An option on an option. The buyer generally executes the split fee with first an initial fee,
with a window period at the end of which upon payment of a second fee the original terms of the option may
be extended to a later predetermined final notification date.

Stock index option

An option in which the underlying is a common stock index.

Stock option

An option in which the underlying is the common stock of a corporation.

Tax deferral option

The feature of the U.S. Internal Revenue Code that the capital gains tax on an asset is
payable only when the gain is realized by selling the asset.

Tax-timing option

The option to sell an asset and claim a loss for tax purposes or not to sell the asset and
defer the capital gains tax.

Throughput agreement

An agreement to put a specified amount of product per period through a particular
facility. For example, an agreement to ship a specified amount of crude oil per period through a particular
pipeline.

Time value of an option

The portion of an option's premium that is based on the amount of time remaining
until the expiration date of the option contract, and that the underlying components that determine the value of
the option may change during that time. Time value is generally equal to the difference between the premium
and the intrinsic value. Related: in-the-money.

Timing option

For a Treasury Bond or note futures contract, the seller's choice of when in the delivery month to deliver.

Transferable put right

An option issued by the firm to its shareholders to sell the firm one share of its
common stock at a fixed price (the strike price) within a stated period (the time to maturity). The put right is
"transferable" because it can be traded in the capital markets.

Two-state option pricing model

An option pricing model in which the underlying asset can take on only two
possible (discrete) values in the next time period for each value it can take on in the preceding time period.
Also called the binomial option pricing model.

Virtual currency option

A new option contract introduced by the PHLX in 1994 that is settled in US$ rather
than in the underlying currency. These options are also called 3-Ds (dollar denominated delivery).

Wild card option

The right of the seller of a Treasury Bond futures contract to give notice of intent to deliver
at or before 8:00 p.m. Chicago time after the closing of the exchange (3:15 p.m. Chicago time) when the
futures settlement price has been fixed. Related: Timing option.

Yield curve option-pricing models

Models that can incorporate different volatility assumptions along the
yield curve, such as the Black-Derman-Toy model. Also called arbitrage-free option-pricing models.

Throughput contribution

Sales revenue less the cost of materials.

Call Option

A contract that gives the holder the right to buy an asset for a
specified price on or before a given expiration (maturity) date

cafeteria plan a “menu” of fringe benefit options that include

cash or nontaxable benefits

computer-aided design (CAD)

a system using computer graphics for product designs

computer-aided manufacturing (CAM)

the use of computers to control production processes through numerically
controlled (NC) machines, robots, and automated assembly systems

computer integrated manufacturing (CIM)

the integration of two or more flexible manufacturing systems through the use of a host computer and an information networking system

input-output coefficient

a number (prefaced as a multiplier
to an unknown variable) that indicates the rate at which each
decision variable uses up (or depletes) the scarce resource

stock option

a right allowing the holder to purchase shares of common stock during some future time frame and at a specified price

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