What is a Put Option?

Put Option Definition. A Put Option, often simply labeled a “Put”, is a contract in which the Buyer has the right but not the obligation to sell a particular security, commodity or currency for a given strike price on, in the case of European Put options, or before, in the case of American Put options, the expiration date. The Seller, or “Writer”, is obligated to buy the underlying security, commodity or currency if the Buyer should so decide, and for this right the Buyer pays a fee, called a premium. The Buyer expects prices to fall, thereby increasing the value of their option. Their downside risk is limited to the premium that they paid. When the price of the currency or the underlying instrument falls below the strike price, the option is said to be “in the money”. It is prudent to sell an “in the money” put option before it expires. Some brokers will automatically sell your “in the money” put option before expiration because they earn a commission. Otherwise, you will need to exercise your put option to realize your gain. A forex trader may buy a put option to protect their downside from excessive loss should the market move dramatically against his position. Sellers of put options typically want to accumulate a position in a currency, but only at a specific price. If the Seller does not have the currency, the option is referred to as a “naked put”. If you wish to deal in currency options, be sure to check with your broker since not all forex brokers deal in options.

Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.