4.1 – Put Option
I hope by now you are through with the practicalities of a Call option from both the buyers’ and sellers’ perspectives. If you are indeed familiar with the call option, then orienting yourself to understand ‘Put Options’ is pretty straightforward. The only change in a put option (from the buyer’s perspective) is that the view on markets should be bearish instead of the bullish sentiment of a call option buyer.
Let’s learn more in this video.
We recommend reading this chapter on Varsity to learn more and understand the concepts in-depth.
Key takeaways from this chapter
- Buy a Put Option when you are bearish about the underlying prospects. In other words, a Put option buyer is profitable only when the underlying declines in value.
- The intrinsic value calculation of a Put option is slightly different from the intrinsic value calculation of a call option.
- IV (Put Option) = Strike Price – Spot Price
- The P&L of a Put Option buyer can be calculated as P&L = [Max (0, Strike Price – Spot Price)] – Premium Paid
- The breakeven point for the put option buyer is calculated as Strike – Premium Paid