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Put Options
A put option is the right to sell a stock at the strike price on a specified date. A put option is only exercised if the strike price X is above the market price S and the pay off is the difference between the strike price and stock price.
Intrinsic Value
The intrinsic value of a put option is the greater of: zero (0) or X - S (Strike Price - Stock Price).
For example:
A put option with a strike price of $30 has an intrinsic value of $10 when the underlying stock is priced at $20, and the option has an intrinsic value of $0 when the underlying stock is priced at $60.
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Example: Put Options
Complete the following table, giving the payoffs for various stock prices for a put option buyer and seller for a put option with a strike price of $40.
Practice: Call Options
Show the option pay-offs for both the long and short positions for a put option with a strike price of $25. Show the pay-offs for the following stock prices: $0, $10, $20, $30, $40 and $50.
| $0 | $10 | $20 | $30 | $40 | $50 | |
| Long payoff | ||||||
| Short payoff |