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Put Option

A derivative security that gives the holder the right to sell the underlying security at a fixed price.

By purchasing a put, the holder can protect against a decline in the underlying stock's price. For example, if an investor owns stock trading at $50, he could purchase a $45 put that would appreciate in value if the stock fell below $45. If at expiration the stock was trading at $35, the put would have a value of $10. Because of the price protection, puts purchased in conjunction with stock that you own are called "protective puts." "American style" listed options, traded on various US exchanges, can be exercised or sold at any time between their purchase and their expiration. If the holder in the example above exercised his put, he would deliver stock and receive $45 a share, regardless of the market price.

Private option contracts can be negotiated between shareholders who hold concentrated stock positions and financial institutions. Also called "protective put" contracts, these instruments can have customized strike prices and expirations. They can also be structured to protect stocks that do not have corresponding listed options. Private contracts generally settle "European style" at expiration only. They most often settle in cash for any in-the-money difference between the strike price and the market price.

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