Put on a Put
What Is a Put on a Put?
A put on a put is a options contract that gives the holder the right to sell an underlying put options contract. The put on a put trade is one of four types of compound options.
Basically, a put on a put option is an option to sell an option. The underlying asset of the put on a put option is the original option. Put on a put options are more normal on European exchanges than in the United States.
Put on a Put Explained
The buyer of a put option is a trader who expects the asset whereupon the option is based to fall in price. The trader purchases a put option, ordinarily for 100 shares, that permits the shares to be sold at a certain price (the strike price) by a predefined expiration date. Assuming the trader is right and the asset falls, the option is in the money and can be worked out, with the trader benefitting from the difference between the option price and the market price.
A put on a put option includes two put options, one over the other. A put on a put has two strike prices and two expiration dates. One is for the compound put option and the other is for the underlying vanilla option.
Note that compound options are more normal in Europe, and European options can be practiced exclusively on the expiration date. A American option can be practiced on or whenever before the date of expiration.
Since one of the factors that decide the cost of an option is the price of the underlying asset, the cost of a put on a put option will generally be lower than the cost of a vanilla put on the comparing asset. Consequently, it can give a leverage to the options trader.
When to Use a Put on a Put
A put on a put option is utilized when a trader needs to utilize leverage. The trader will likewise be modestly bullish on the underlying asset. The value of a put on a put changes in direct extent to the price of the underlying asset. This means the value increments as the asset price increments, and diminishes as the asset price diminishes.
Other Compound Options
The other three types of compound options are:
- Call on a put: This is a call option on an underlying put option. The owner who practices the call option gets a put option.
- Call on a call: In this option, the investor buys one more call option with redid provisions. These provisions incorporate the right to buy a plain vanilla call option on an underlying security.
- Put on a call: The investor must deliver the underlying call option to the seller and collect a premium in light of the strike price of the overlying put option.
These options are otherwise called parted expense options.
Features
- A put on a put is an options contract that gives its buyer the right to sell an underlying options contract.
- A put on a put is basically an option to sell an option.
- The underlying asset of the put on a put option is a vanilla put option.
