Put to Seller
What Is Put to Vendor?
“Put to vendor” describes the method of a put possibility being exercised. The put author turns into accountable for receiving the underlying shares from the put purchaser on the strike worth since being lengthy a put offers the holder the correct to promote the underlying asset.
Put to vendor often happens when the put’s strike worth is decrease than the market worth of the underlying safety. At this level, the put purchaser has the correct, however not the duty, to promote the underlying asset to the choice author on the strike worth.
Key Takeaways
- Put to vendor refers back to the means of a put possibility being exercised.
- A put possibility offers the holder the correct, however not the duty, to promote an asset at a predetermined worth—the strike worth—earlier than the choice expires.
- When a put possibility is exercised, the put author receives the underlying shares from the lengthy put holder on the strike worth.
- When a put to vendor happens, the quick aspect of the put is claimed to be assigned.
- This may most frequently happen when the put is in-the-money, which means that the quick aspect of the put should buy shares at a worth better than the present market worth.
Understanding Put to Vendor
Put to vendor happens when a put purchaser holds the contract to expiry or decides to train the put possibility. In each circumstances, the put author is obligated to obtain the underlying safety that the put purchaser has successfully offered on the strike worth.
The revenue on a brief put place is restricted to the premium acquired, however the threat might be vital. When writing a put, the author is required to purchase the underlying on the strike worth. If the worth of the underlying falls beneath the strike worth, the put author may face a major loss.
Particular Concerns
How a Put Possibility Works
A put possibility offers the holder the correct, however not the duty, to promote an asset on the strike worth earlier than the choice expires. For instance, inventory XYZ is buying and selling at $26. A dealer buys a put possibility for $25 at a premium—or worth—of $1.50. The choice expires in three months. If the worth of XYZ drops beneath $25, that possibility is within the cash, and the choice holder might select to train the put possibility they bought. The put possibility offers the investor the correct to promote inventory to the author at $25, though the inventory might presently be buying and selling at $24, $20, and even $1.
The choice price $1.50; the premium was $1.50. Due to this fact, the holder’s breakeven worth is $23.50. If the worth of the inventory stays above $25—and the three months go—the choice is nugatory, and the holder losses $1.50 per share. A single possibility contract represents 100 shares, so if the dealer purchased three choices, they’d lose $450, or 3 x 100 x $1.50 = $450.
On the flip aspect, the one who wrote (offered) the choice should purchase shares at $25 if assigned by the lengthy. If the worth of the underlying drops to $10, they nonetheless must ship the put holder quick shares at $25 for a $15 loss per contract (much less the premium earned). Thus, in alternate for the chance that possibility writers tackle, they get the premium the choice purchaser pays.
If the choice is exercised (typically when it’s deep within the cash) and the author wants to purchase the shares, this can require a further money outlay. On this case, for each quick put contract, the dealer might want to purchase $2,500 value of inventory ($25 x 100 shares).
The choice’s premium is essentially the most that an possibility author could make.
Instance of Put to Vendor
Take into account a state of affairs the place an investor buys put choices to hedge draw back threat of their place in inventory A, which is presently buying and selling close to $36. The investor buys a three-month placed on inventory A, with a strike worth of $35, and pays a premium of $2. The put author, who earns the premium of $2, assumes the chance of shopping for inventory A from the investor if it falls beneath $35.
Towards the tip of the three-month interval, if inventory A is buying and selling at $22, the lengthy will train the places and promote inventory A to the put author and obtain $35 for every share. On this case, the put possibility is exercised; in different phrases, it’s put to the vendor.
What Does Put Promoting Imply?
Put promoting refers to promoting a put possibility (the particular person promoting additionally it is often called the “author”). As a result of put choices achieve worth when the underlying asset falls, the put vendor seeks to revenue from a rise within the underlying’s worth by amassing the premium related to a sale in a brief put and hoping the choice expires out-of-the-money (OTM) and nugatory.
What Is a Bare Put?
When any person sells a put with out every other offsetting place, it’s stated to be uncovered or “bare.” This place can lead to vital losses if the worth of the underlying drops.
Do You Should Personal a Put to Promote It?
No. In contrast to promoting quick inventory, which requires borrowing present shares to promote them, put choices are derivatives contracts which might be created when a purchaser and a vendor conform to transact. That is referred to as promoting to open a place. After all, if you’re already lengthy a put, you can even promote it to shut the place.
Why Promote a Put As a substitute of Shopping for a Name?
Each an extended name and a brief put generate profits when the underlying safety will increase in worth. Nevertheless, shopping for a name entails paying the choice’s premium, which incurs a value. Alternatively, promoting a put ends in fast revenue of its premium. Be aware, nevertheless, {that a} quick put has restricted upside potential (the premium acquired) however vital loss potential. A protracted name, in distinction, has restricted loss potential (the premium paid) and limitless upside potential.
Correction—Oct. 8, 2022: A earlier model of this text incorrectly mentioned limitless loss potential when promoting a unadorned put with a corresponding worth rise; Moreover, it incorrectly talked about {that a} quick put has a vast loss potential.
