A put option is a financial contract that gives the holder the right, but not obligation, to sell an asset at a predetermined price (strike price) within a specific timeframe. This tool is commonly used for hedging against market downturns or speculating on falling prices.

Key Features of Put Options:

• Strike Price: The guaranteed selling price
• Expiration Date: Deadline to exercise the option
• Premium: Cost paid to purchase the option
• Intrinsic Value: Difference between strike price and market price

How Put Options Work:

• Value increases as underlying asset price decreases
• Commonly used for portfolio protection
• Can be traded through specialized brokers
• Time decay reduces option value as expiration approaches

Example: If you buy a put option with a $50 strike price when a stock trades at $50, and the stock falls to $40, you can:

• Exercise the option to sell at $50
• Sell the option for a profit
• Let it expire if the stock price rises above $50

Risk Considerations:

• Maximum loss limited to premium paid (for buyers)
• Maximum profit is strike price minus premium (if stock goes to zero)
• Time decay works against option buyers
• Writing puts carries potentially significant risk

Trading Strategy: Most traders sell valuable options rather than exercise them because:

• Captures remaining time value
• Reduces transaction costs
• Avoids additional margin requirements
• Provides more immediate liquidity

Put options are essential tools for risk management and speculative trading, but require careful consideration of market conditions, timing, and risk tolerance.

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