Option Concepts – Puts

What Is a Put Option?

A put option is a contract that gives the holder the right to sell a specific amount of an asset at a predetermined price within a set period of time.

Let’s discuss this price, referred to as a strike price.

Strike Price

A strike price is a price and point at which an option can be exercised. It directly impacts the value of the underlying option’s value.

In Practice

You’ve bought a put option against an equity position with a strike price of $100. If this position falls to $90, your option becomes more valuable, because you have the right to sell it at $100 when the market only offers $90.

Risk Management

Puts could also be viewed as a form of insurance against a decline in a company that you directly own.

Example: You own XYZ industries and want to hold it forever. You are concerned about a short-term decline in the stock’s price and would like to temporarily minimize your exposure. You could simply sell the stock, however in this case you have a large long-term gain in the position that would generate a significant taxable event were you to sell. You could buy a put relatively inexpensively to hedge your position while continuing to own the stock, shielding yourself from losses without generating a tax bill.

“PUT” that in your back pocket.

The information in this post was written by S. Zachary Fineberg, CFP(r) Managing Member of Fineberg Wealth Management, LLC, a registered investment advisor. If you would like to schedule a consultation to discuss how Fineberg Wealth Management can help you reach your long-term financial goals, please make contact to discuss.