Put options are often a topic of discomfort and
uncertainty for options investors. If stock values decline, a put option holder may yield a profit
by choosing to exercise his/her right to sell stocks at a higher price.
However, if stock prices do not decline then an investor will not be able to
redeem his/her option. In cases such as these, not only will the buyer not make
a profit, but he/she will also lose the premium payment he/she supplied the
writer. Therefore, while these types of derivatives may have benefits for an
investor, they are also risky undertakings.
Individuals
do not always purchase put options with the intention of turning a profit. In
many cases, investors obtain these derivatives in order to hedge their investments.
If a shareholder obtains a put option and the value of stocks decrease, then
he/she will be permitted to sell his/her stocks for a reasonable price, thereby
protecting his/her investments. If a shareholder does not possess a put option
during a decline in stock price, he/she will be required to sell his/her stocks
for a lower price than he/she purchased them, thereby losing a portion of
his/her investment.
