Article

Put Option
June 07 , 2012

We assume you know what an option is - the idea being that you pay a small charge to get a choice to buy or sell something later at a predetermined price. In a put option, the choice is to sell the product. Thus, a put option is typically used by someone who holds or expects to hold the product later.

Consider a farmer expecting a rice crop of one tonne in four months' time. His concern would be finding a buyer at that time, and fixing the price so that he is protected against fall in rice prices in the interim four months. One way he can do this is by buying put options on rice, at a price he expects to earn. Obviously, the higher he expects to earn (relative to the current prevailing price), the higher he will have to pay to buy the put option. But thereafter, his worries about selling the rice are taken care of.

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