Put Option

The buyer of a put option has acquired the right to...

1. A.Force the writer to sell them stockA put lets the holder sell TO the writer; it is a call that lets the holder buy FROM the writer.
2. B.Receive a guaranteed dividendOptions convey no dividend rights; only stock ownership does.
3. C.Buy the underlying stock at the strike priceThat is a call, not a put.
4. D.Sell the underlying stock at the strike priceCorrect — a put is the right to sell at the strike.

Why: A put gives its holder the right to SELL the underlying stock at the strike price. The writer of the put has the matching obligation to buy.

The WRITER of a put option takes on the obligation to:

1. A.Buy the underlying security at the strike price if assignedCorrect. When the put holder exercises the right to sell, the writer must take delivery and pay the strike.
2. B.Pay the option premium at expirationPremiums are paid up front by the BUYER; the writer collects the premium.
3. C.Deliver the underlying security upon exerciseDelivering shares is what a call writer (or exercising put holder) does; the put writer receives shares.
4. D.Sell the underlying security at the strike price if assignedSelling at the strike is the CALL writer's obligation, not the put writer's.

Why: Writing a put obligates the seller to BUY the underlying at the strike price if the holder exercises. The holder has the right to sell; the writer stands on the other side and must purchase. The clue is writer plus put - obligations belong to writers, rights to buyers. Review: Derivatives and Insurance Products.

Ines Corradine holds two contracts. The first gives her the right, for six months, to buy a parcel of undeveloped land at a stated price. The second gives her the right, for six months, to buy 500 shares of a listed company at a stated price. Under the Uniform Securities Act, which is a security?

1. A.Both options, because each is a right to buy an asset at a set price.Incorrect. Only the option on a security is within the definition.
2. B.The option on the land only, because an option is itself a contract of value.Incorrect. An option on real property is not an option on a security.
3. C.The option on the 500 shares only.Correct. The definition covers options and privileges on a security.
4. D.Neither option, because an option is a right to acquire property rather than property itself.Incorrect. Options on securities are expressly named in the definition.

Why: The definition includes a put, call, straddle, option or privilege on any security. An option on real property is not on a security and is therefore outside the definition; the option on the shares is itself a security, quite apart from the shares underlying it.

The buyer of a put option has...

1. A.The right to buy the underlying at the strike priceThe right to buy belongs to a call buyer, not a put buyer.
2. B.The obligation to buy the underlyingThe put writer, not the buyer, may be obligated to buy.
3. C.The right to sell the underlying at the strike priceCorrect — a put buyer has the right to sell at the strike.
4. D.The obligation to sell the underlyingA put buyer has a right, not an obligation.

Why: A put buyer purchases the right to SELL the underlying at the strike price, profiting if the price falls. The position is bearish, and the maximum loss is the premium paid.