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58-568: (Redirected from PUT ) [REDACTED] Look up put in Wiktionary, the free dictionary. Put or PUT may refer to: Finance [ edit ] Put option , a financial contract between a buyer and a seller CBOE S&P 500 PutWrite Index (ticker symbol) Science and technology [ edit ] Programmable unijunction transistor Computing [ edit ] Parameterized unit testing , in computer programming Put,

116-932: A Hypertext Transfer Protocol request method Put, a File Transfer Protocol option to copy a file to a remote system; see List of FTP commands Put, an output procedure in Pascal , Turing, and other programming languages In C, simple functions, puts and puts() , that put text on the screen Education [ edit ] Petroleum University of Technology , Abadan, Ahvaz, Mahmud Abad and Tehran, Iran Poznań University of Technology , Poland (Polish name: Politechnika Poznańska ) Transportation [ edit ] Pui To stop (MTR station code), Hong Kong Putney railway station (National Rail station code), London Sri Sathya Sai Airport (IATA code), Puttaparthi, Andhra Pradesh, India Other uses [ edit ] Phut or Put, Biblical grandson of Noah Put (band) , from Rijeka, Croatia Put (card game) ,

174-647: A 10,000 GBP long position in Vodafone an investor would hedge with a 20,000 GBP equivalent short position in the FTSE futures. Futures contracts and forward contracts are means of hedging against the risk of adverse market movements. These originally developed out of commodity markets in the 19th century, but over the last fifty years a large global market developed in products to hedge financial market risk. Investors who primarily trade in futures may hedge their futures against synthetic futures. A synthetic in this case

232-540: A 16th-century card game See also [ edit ] Putt (disambiguation) Putte (disambiguation) Topics referred to by the same term [REDACTED] This disambiguation page lists articles associated with the title Put . If an internal link led you here, you may wish to change the link to point directly to the intended article. Retrieved from " https://en.wikipedia.org/w/index.php?title=Put&oldid=1094515289 " Category : Disambiguation pages Hidden categories: Short description

290-416: A B2B-strategy, they would buy the exact amount of coal at the very moment when the household customer comes into their shop and signs the contract. This strategy minimizes many commodity risks , but has the drawback that it has a large volume and liquidity risk , as BlackIsGreen does not know whether it can find enough coal on the wholesale market to fulfill the need of the households. Tracker hedging

348-480: A certain amount and price at a certain future date. Because of that, there is always the possibility that the buyer will not pay the amount required at the end of the contract or that the buyer will try to renegotiate the contract before it expires. Futures contracts are another way our farmer can hedge his risk without a few of the risks that forward contracts have. Futures contracts are similar to forward contracts except they are more standardized (i.e. each contract

406-411: A contrary or opposing market or investment. The word hedge is from Old English hecg , originally any fence, living or artificial. The first known use of the word as a verb meaning 'dodge, evade' dates from the 1590s; that of 'insure oneself against loss,' as in a bet, is from the 1670s. Optimal hedging and optimal investments are intimately connected. It can be shown that one person's optimal investment

464-413: A gamble entails. Betting against your team or political candidate, for example, may signal to you that you are not as committed to them as you thought you were. Equity in a portfolio can be hedged by taking an opposite position in futures. To protect your stock picking against systematic market risk , futures are shorted when equity is purchased, or long futures when stock is shorted . One way to hedge

522-432: A position in the underlying stock, but only if the price is low enough. If the buyer fails to exercise the options, then the writer keeps the option premium. If the underlying stock's market price is below the option's strike price when expiration arrives, the option owner (buyer) can exercise the put option, forcing the writer to buy the underlying stock at the strike price. That allows the exerciser (buyer) to profit from

580-427: A positive return only if the underlying price falls below the strike when the option is exercised. A European option can only be exercised at time T rather than at any time until T , and a Bermudan option can be exercised only on specific dates listed in the terms of the contract. If the option is not exercised by maturity, it expires worthless. (The buyer will not usually exercise the option at an allowable date if

638-484: A second means of hedging risk on a single stock by selling short the market, as opposed to another single or selection of stocks. Futures are generally highly fungible and cover a wide variety of potential investments, which makes them easier to use than trying to find another stock which somehow represents the opposite of a selected investment. Futures hedging is widely used as part of the traditional long/short play. Employee stock options (ESOs) are securities issued by

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696-409: Is a pre-purchase approach, where the open position is decreased the closer the maturity date comes. If BlackIsGreen knows that most of the consumers demand coal in winter to heat their house, a strategy driven by a tracker would now mean that BlackIsGreen buys e.g. half of the expected coal volume in summer, another quarter in autumn and the remaining volume in winter. The closer the winter comes,

754-410: Is a synthetic future comprising a call and a put position. Long synthetic futures means long call and short put at the same expiry price. To hedge against a long futures trade a short position in synthetics can be established, and vice versa. Stack hedging is a strategy which involves buying various futures contracts that are concentrated in nearby delivery months to increase the liquidity position. It

812-521: Is another's optimal hedge (and vice versa). This follows from a geometric structure formed by probabilistic representations of market views and risk scenarios. In practice, the hedge-investment duality is related to the widely used notion of risk recycling. A typical hedger might be a commercial farmer. The market values of wheat and other crops fluctuate constantly as supply and demand for them vary, with occasional large moves in either direction. Based on current prices and forecast levels at harvest time,

870-413: Is called " put-call parity ". Put options are most commonly used in the stock market to protect against a fall in the price of a stock below a specified price. If the price of the stock declines below the strike price, the holder of the put has the right, but not the obligation, to sell the asset at the strike price, while the seller of the put has the obligation to purchase the asset at the strike price if

928-416: Is different from Wikidata All article disambiguation pages All disambiguation pages Put option Puts may also be combined with other derivatives as part of more complex investment strategies, and in particular, may be useful for hedging . Holding a European put option is equivalent to holding the corresponding call option and selling an appropriate forward contract . This equivalence

986-423: Is equal to the strike price (at which he must buy the stock to cover the option) minus the premium received. The potential upside is the premium received when selling the option: if the stock price is above the strike price at expiration, the option seller keeps the premium, and the option expires worthless. During the option's lifetime, if the stock moves lower, the option's premium may increase (depending on how far

1044-401: Is generally used by investors to ensure the surety of their earnings for a longer period of time. A contract for difference (CFD) is a two-way hedge or swap contract that allows the seller and purchaser to fix the price of a volatile commodity. Consider a deal between an electricity producer and an electricity retailer, both of whom trade through an electricity market pool. If the producer and

1102-481: Is limited to the option's strike price less the underlying's spot price and the premium/fee paid for it. The put 'writer' believes that the underlying security's price will rise, not fall. The writer sells the put to collect the premium. The put writer's total potential loss is limited to the put's strike price less the spot and premium already received. Puts can be used also to limit the writer's portfolio risk and may be part of an options spread . The put buyer/owner

1160-403: Is short on the underlying asset of the put, but long on the put option itself. That is, the buyer wants the value of the put option to increase by a decline in the price of the underlying asset below the strike price. The writer (seller) of a put is long on the underlying asset and short on the put option itself. That is, the seller wants the option to become worthless by an increase in the price of

1218-406: Is the market neutral approach. In this approach, an equivalent dollar amount in the stock trade is taken in futures – for example, by buying 10,000 GBP worth of Vodafone and shorting 10,000 worth of FTSE futures (the index in which Vodafone trades). Another way to hedge is the beta neutral. Beta is the historical correlation between a stock and an index. If the beta of a Vodafone stock is 2, then for

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1276-405: Is the same quantity and date for everyone). These contracts trade on exchanges and are guaranteed through clearing houses . Clearing houses ensure that every contract is honored and they take the opposite side of every contract. Futures contracts typically are more liquid than forward contracts and move with the market. Because of this, the farmer can minimize the risk he faces in the future through

1334-458: Is wiped off the value of the widgets industry in the course of a few hours. Nevertheless, since Company A is the better company, it suffers less than Company B: Value of long position (Company A): Value of short position (Company B): Without the hedge, the trader would have lost $ 450. But the hedge – the short sale of Company B – nets a profit of $ 25 during a dramatic market collapse. The introduction of stock market index futures has provided

1392-487: The financial risk of an option by hedging against price changes in its underlying . It is so called as Delta is the first derivative of the option's value with respect to the underlying instrument 's price. This is performed in practice by buying a derivative with an inverse price movement. It is also a type of market neutral strategy. Only if BlackIsGreen chooses to perform delta-hedging as strategy, actual financial instruments come into play for hedging (in

1450-400: The stock price of Company A will rise over the next month, due to the company's new and efficient method of producing widgets . They want to buy Company A shares to profit from their expected price increase, as they believe that shares are currently underpriced. But Company A is part of a highly volatile widget industry. So there is a risk of a future event that affects stock prices across

1508-430: The wholesale market and selling it to households mostly in winter. Back-to-back (B2B) is a strategy where any open position is immediately closed, e.g. by buying the respective commodity on the spot market. This technique is often applied in the commodity market when the customers’ price is directly calculable from visible forward energy prices at the point of customer sign-up. If BlackIsGreen decides to have

1566-410: The 19th century to allow transparent, standardized, and efficient hedging of agricultural commodity prices; they have since expanded to include futures contracts for hedging the values of energy , precious metals , foreign currency , and interest rate fluctuations. Hedging is the practice of taking a position in one market to offset and balance against the risk adopted by assuming a position in

1624-487: The United States faces a risk of changes in the value of the U.S. dollar and chooses to open a production facility in that market to match its expected sales revenue to its cost structure. Another example is a company that opens a subsidiary in another country and borrows in the foreign currency to finance its operations, even though the foreign interest rate may be more expensive than in its home country: by matching

1682-404: The better are the weather forecasts and therefore the estimate, how much coal will be demanded by the households in the coming winter. Retail customers’ price will be influenced by long-term wholesale price trends. A certain hedging corridor around the pre-defined tracker-curve is allowed and fraction of the open positions decreases as the maturity date comes closer. Delta-hedging mitigates

1740-405: The buyer and seller. For this example, the farmer can sell a number of forward contracts equivalent to the amount of wheat he expects to harvest and essentially lock in the current price of wheat. Once the forward contracts expire, the farmer will harvest the wheat and deliver it to the buyer at the price agreed to in the forward contract. Therefore, the farmer has reduced his risks to fluctuations in

1798-429: The buyer does not exercise their option, the writer's profit is the premium. A put option is said to have intrinsic value when the underlying instrument has a spot price ( S ) below the option's strike price ( K ). Upon exercise, a put option is valued at K-S if it is " in-the-money ", otherwise its value is zero. Prior to exercise, an option has time value apart from its intrinsic value. The following factors reduce

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1856-410: The buyer would not exercise the option if it had a negative payoff. A buyer thinks the price of a stock will decrease. They pay a premium that they will never get back, unless it is sold before it expires. The buyer has the right to sell the stock at the strike price. The writer receives a premium from the buyer. If the buyer exercises their option, the writer will buy the stock at the strike price. If

1914-791: The company mainly to its own executives and employees. These securities are more volatile than stocks. An efficient way to lower the ESO risk is to sell exchange traded calls and, to a lesser degree, to buy puts. Companies discourage hedging the ESOs but there is no prohibition against it. Airlines use futures contracts and derivatives to hedge their exposure to the price of jet fuel . They know that they must purchase jet fuel for as long as they want to stay in business, and fuel prices are notoriously volatile. By using crude oil futures contracts to hedge their fuel requirements (and engaging in similar but more complex derivatives transactions), Southwest Airlines

1972-400: The debt payments to expected revenues in the foreign currency, the parent company has reduced its foreign currency exposure. Similarly, an oil producer may expect to receive its revenues in U.S. dollars, but faces costs in a different currency; it would be applying a natural hedge if it agreed to, for example, pay bonuses to employees in U.S. dollars. One common means of hedging against risk is

2030-421: The difference between the stock's market price and the option's strike price. But if the stock's market price is above the option's strike price at the end of expiration day, the option expires worthless, and the owner's loss is limited to the premium (fee) paid for it (the writer's profit). The seller's potential loss on a naked put can be substantial. If the stock falls all the way to zero (bankruptcy), his loss

2088-422: The farmer might decide that planting wheat is a good idea one season, but the price of wheat might change over time. Once the farmer plants wheat, he is committed to it for an entire growing season. If the actual price of wheat rises greatly between planting and harvest, the farmer stands to make a lot of unexpected money, but if the actual price drops by harvest time, he is going to lose the invested money. Due to

2146-445: The farmer will generate a loss on the futures market which is offset by an increase in revenues on the spot market for wheat. Instead of agreeing to sell his wheat to one person on a set date, the farmer will just buy and sell futures on an exchange and then sell his wheat wherever he wants once he harvests it. A common hedging technique used in the financial industry is the long/short equity technique. A stock trader believes that

2204-424: The lower yields affect the entire wheat industry and the price of wheat increases due to supply and demand pressures. Also, while the farmer hedged all of the risks of a price decrease away by locking in the price with a forward contract, he also gives up the right to the benefits of a price increase. Another risk associated with the forward contract is the risk of default or renegotiation. The forward contract locks in

2262-406: The market of wheat because he has already guaranteed a certain number of bushels for a certain price. However, there are still many risks associated with this type of hedge. For example, if the farmer has a low yield year and he harvests less than the amount specified in the forward contracts, he must purchase the bushels elsewhere in order to fill the contract. This becomes even more of a problem when

2320-467: The option's right to sell it differ depending on option style. A European put option allows the holder to exercise the put option for a short period of time right before expiration, while an American put option allows exercise at any time before expiration. The most widely traded put options are on stocks/equities, but they are traded on many other instruments such as interest rates (see interest rate floor) or commodities. The put buyer either believes that

2378-433: The owner uses the right to do so (the holder is said to exercise the option). In this way the buyer of the put will receive at least the strike price specified, even if the asset is currently worthless. If the strike is K , and at time t the value of the underlying is S(t) , then in an American option the buyer can exercise the put for a payout of K −S(t) any time until the option's maturity date T . The put yields

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2436-411: The pool volatility is nullified and the parties pay and receive $ 50 per MWh. However, the party who pays the difference is " out of the money " because without the hedge they would have received the benefit of the pool price. Hedging can be used in many different ways including foreign exchange trading . The stock example above is a "classic" sort of hedge, known in the industry as a pairs trade due to

2494-427: The price of the futures contracts for wheat converge as time gets closer to the delivery date, so in order to make money on the hedge, the farmer must close out his position earlier than then. On the chance that prices decrease in the future, the farmer will make a profit on his short position in the futures market which offsets any decrease in revenues from the spot market for wheat. On the other hand, if prices increase,

2552-474: The price of the underlying is greater than K .) The most obvious use of a put option is as a type of insurance . In the protective put strategy, the investor buys enough puts to cover their holdings of the underlying so that if the price of the underlying falls sharply, they can still sell it at the strike price. Another use is for speculation : an investor can take a short position in the underlying stock without trading in it directly. The terms for exercising

2610-413: The retailer agree to a strike price of $ 50 per MWh, for 1 MWh in a trading period, and if the actual pool price is $ 70, then the producer gets $ 70 from the pool but has to rebate $ 20 (the "difference" between the strike price and the pool price) to the retailer. Conversely, the retailer pays the difference to the producer if the pool price is lower than the agreed upon contractual strike price. In effect,

2668-424: The same value of shares (the value, number of shares × price, is $ 1000 in both cases). If the trader was able to short sell an asset whose price had a mathematically defined relation with Company A's stock price (for example a put option on Company A shares), the trade might be essentially riskless. In this case, the risk would be limited to the put option's premium. On the second day, a favorable news story about

2726-441: The selling of futures contracts. Futures contracts also differ from forward contracts in that delivery never happens. The exchanges and clearing houses allow the buyer or seller to leave the contract early and cash out. So tying back into the farmer selling his wheat at a future date, he will sell short futures contracts for the amount that he predicts to harvest to protect against a price decrease. The current (spot) price of wheat and

2784-431: The stock falls and how much time passes). If it does, it becomes more costly to close the position (repurchase the put, sold earlier), resulting in a loss. If the stock price completely collapses before the put position is closed, the put writer potentially can face catastrophic loss. In order to protect the put buyer from default, the put writer is required to post margin . The put buyer does not need to post margin because

2842-426: The term hedging indicates, this risk mitigation is usually done by using financial instruments , but a hedging strategy as used by commodity traders like large energy companies, is usually referring to a business model (including both financial and physical deals). In order to show the difference between these strategies, consider the fictional company BlackIsGreen Ltd trading coal by buying this commodity at

2900-684: The time value of a put option: shortening of the time to expire, decrease in the volatility of the underlying, and increase of interest rates. Option pricing is a central problem of financial mathematics . Hedge (finance) A hedge is an investment position intended to offset potential losses or gains that may be incurred by a companion investment. A hedge can be constructed from many types of financial instruments , including stocks , exchange-traded funds , insurance , forward contracts , swaps , options , gambles, many types of over-the-counter and derivative products, and futures contracts . Public futures markets were established in

2958-399: The trading on a pair of related securities. As investors became more sophisticated, along with the mathematical tools used to calculate values (known as models), the types of hedges have increased greatly. Examples of hedging include: A hedging strategy usually refers to the general risk management policy of a financially and physically trading firm how to minimize their risks. As

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3016-410: The uncertainty of future supply and demand fluctuations, and the price risk imposed on the farmer, the farmer in this example may use different financial transactions to reduce, or hedge, their risk. One such transaction is the use of forward contracts. Forward contracts are mutual agreements to deliver a certain amount of a commodity at a certain date for a specified price and each contract is unique to

3074-407: The underlying asset above the strike price. Generally, a put option that is purchased is referred to as a long put and a put option that is sold is referred to as a short put . A naked put , also called an uncovered put , is a put option whose writer (the seller) does not have a position in the underlying stock or other instrument. This strategy is best used by investors who want to accumulate

3132-456: The underlying asset's price will fall by the exercise date or hopes to protect a long position in it. The advantage of buying a put over short selling the asset is that the option owner's risk of loss is limited to the premium paid for it, whereas the asset short seller's risk of loss is unlimited (its price can rise greatly, in fact, in theory it can rise infinitely, and such a rise is the short seller's loss). The put buyer's prospect (risk) of gain

3190-444: The usual, stricter meaning). Risk reversal means simultaneously buying a call option and selling a put option . This has the effect of simulating being long on a stock or commodity position. Many hedges do not involve exotic financial instruments or derivatives such as the married put . A natural hedge is an investment that reduces the undesired risk by matching cash flows (i.e. revenues and expenses). For example, an exporter to

3248-404: The whole industry, including the stock of Company A along with all other companies. Since the trader is interested in the specific company, rather than the entire industry, they want to hedge out the industry-related risk by short selling an equal value of shares from Company A's direct, yet weaker competitor , Company B. The first day the trader's portfolio is: The trader has sold short

3306-478: The widgets industry is published and the value of all widgets stock goes up. Company A, however, because it is a stronger company, increases by 10%, while Company B increases by just 5%: The trader might regret the hedge on day two, since it reduced the profits on the Company A position. But on the third day, an unfavorable news story is published about the health effects of widgets, and all widgets stocks crash: 50%

3364-657: Was able to save a large amount of money when buying fuel as compared to rival airlines when fuel prices in the U.S. rose dramatically after the 2003 Iraq war and Hurricane Katrina . As an emotion regulation strategy, people can bet against a desired outcome. A New England Patriots fan, for example, could bet their opponents to win to reduce the negative emotions felt if the team loses a game. Some scientific wagers , such as Hawking's 1974 "insurance policy" bet , fall into this category. People typically do not bet against desired outcomes that are important to their identity, due to negative signal about their identity that making such

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