Put Options

Put options give holders of the option the right, but not the obligation, to sell a specified amount of tokens at a strike price within a specified option expiry time.

Let's understand put options with an example:

Assume you bought a brand new Audi. You are really enjoying your new car, driving it daily. But people constantly nags you to get insurance since it was not a small purchase. And just to shut them down, you bought insurance. Unlikely event occurred and you met with an accident. Fortunately, nothing happened to you but the car got a lot of damage.

Luckily you bought the insurance, so you got nothing to worry about since the insurance company will repair your car for no extra cost.

Buying insurance is exactly like buying a put option. You are holding a large chunk of an asset and you wanted to protect your asset from an unlikely event(Market crash). So what you do is, you purchase a put option by paying premium(insurance in above example) to the option seller. So in case an unlikely event(market crash) happens, you have nothing to worry about.

Put Options are bets that the price of an asset is going to fall.

Here is a typical situation where buying a put option can be beneficial: Say, for example, that you bought ABC at $105, but you start getting concerned, because the asset price is starting to drift down because the market is weakening.

So you decided to purchase a put option with expiry(lets say June 30th) and strike price of $100 for a premium of $8 .

By buying the put, you’re locking in the value of your asset at $100 per share until the expiration date. Now even if the price of the asset drops to $80, you can still sell your asset for $100 dollars to the option seller. So in effect, the put option gives you the right to sell the asset at $100 no matter how low the price falls.

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