How do put options work in finance? what do buyer/sellers get out of it?
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In simple ELI5 terms:
Assume we’re talking about put options on publicly-traded company stock shares.
A buyer of a put option can sell the underlying stock at a set price (called the “strike price”) any time before the option expires. What a buyer gets out of it is insurance. If the buyer already holds the stock, the put option rises in value as the stock value goes down, protecting the investment. The small cost of the put option is the price of that insurance. If the stock goes up, the option expires worthless (the buyer loses this small initial cost) but the stock price goes up.
A seller of the option is obligated to buy the stock at the strike price if the option buyer decides to exercise the option. The benefit to the seller is that most options expire worthless and the seller gets to keep the premium (the buyer’s cost) of the option when the option expires. The risk to the seller is that the stock price goes down too far, in which case the option seller may be forced to buy the stock at the strike price, which may be higher than the actual stock price.
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