Put - Equity Derivatives Provision: Difference between revisions
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{{eqderivanat|2.3(b)}} | {{eqderivanat|2.3(b)}} | ||
The basic definition of a [[put option]]. I am entitled to sell shares to you at a pre-agreed price ({{eqderivprov|Strike Price}}) on a pre-agreed date (i.e., a {{eqderivprov|European Option}}) or a any time up to a pre-agreed date (i.e., an {{eqderivprov|American Option}}). You can also cash settle a put by paying the negative difference between the prevailing share price on the {{eqderivprov|Exercise Date}} and the {{eqderivprov|Strike Price}}. | |||
But what if the difference between the share price and the Strike Price is ''positive'' on the {{eqderivprov|Exercise Date}}? Then you wouldn’t exercise your [[put option]], friend, because you are ''[[homo economicus]]'', remember: the modern embodiment of the [[Reasonable person|rational person on the Clapham Omnibus]]. | |||
At any time where the prevailing share price is below the {{eqderivprov|Strike Price}}, your option is “[[in-the-money]]”. If the share price is above the {{eqderivprov|Strike Price}} it is “[[out-of-the-money]]”. The option has [[time value]] though, so just because it it out of the money it doesn't mean it's worthless. | |||
But you wouldn't exercise it while it was [[out-of-the-money]], all the same. | |||
{{sa}} | {{sa}} | ||
*{{eqderivprov|Call}} | *{{eqderivprov|Call}} | ||
*What it means to be [[short an option]] | *What it means to be [[short an option]] | ||
Revision as of 13:39, 6 September 2019
Template:Eqderivanat The basic definition of a put option. I am entitled to sell shares to you at a pre-agreed price (Strike Price) on a pre-agreed date (i.e., a European Option) or a any time up to a pre-agreed date (i.e., an American Option). You can also cash settle a put by paying the negative difference between the prevailing share price on the Exercise Date and the Strike Price.
But what if the difference between the share price and the Strike Price is positive on the Exercise Date? Then you wouldn’t exercise your put option, friend, because you are homo economicus, remember: the modern embodiment of the rational person on the Clapham Omnibus.
At any time where the prevailing share price is below the Strike Price, your option is “in-the-money”. If the share price is above the Strike Price it is “out-of-the-money”. The option has time value though, so just because it it out of the money it doesn't mean it's worthless.
But you wouldn't exercise it while it was out-of-the-money, all the same.
See also
- Call
- What it means to be short an option