Options & Derivatives

Put Option

A contract giving the right, but not the obligation, to sell an asset at a fixed strike price.

Payoff at expiry is max(K - S, 0). Maximum value is the strike, reached when the asset goes to zero.

Used as insurance, which is why demand for downside puts is structurally one-sided and why they trade at elevated implied volatility - the equity skew.

Early exercise is possible, unlike a call. Once deep in the money the payoff is nearly capped at the strike, so there is little upside left to wait for and taking the cash to earn interest can win. This is why an American put is worth strictly more than a European one.

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