Put - Equity Derivatives Provision

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Equity Derivatives Anatomy


In a Nutshell Section 2.3(b):

Template:Nutshell Equity Derivatives 2.3(b) view template

2002 ISDA Equity Derivatives Definitions full text of Section 2.3(b):

(b) Put. “Put” means an Option Transaction entitling Buyer upon exercise:
(i) where “Cash Settlement” is applicable, to receive from Seller an Option Cash Settlement Amount if the Strike Price exceeds the Settlement Price; and
(ii) where “Physical Settlement” is applicable, to sell Shares or Baskets of Shares to Seller at the Settlement Price per Share or Basket,
in each case as more particularly provided in or pursuant to these Definitions and the related Confirmation.

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Resources About the Equity Derivatives Definitions | (full wikitext) | (nutshell wikitext)
Hot topics Synthetic Prime Brokerage Anatomy | The Triple Cocktail | Cancellation and Payment | Calculation Agent
TOC | 1 General Definitions | 2 Option Transactions | 3 Exercise of Options | 4 Forward Transactions | 5 Equity Swap Transactions | 6 Valuation | 7 Settlement | 8 Cash Settlement | 9 Physical Settlement | 10 Dividends | 11 Adjustments and Modifications | 12 Extraordinary Events · 12.8 Cancellation Amount · 12.9 Additional Disruption Events · 12.9 ADEs · 12.9(b) Consequences of ADEs | 13 Miscellaneous

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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