Why a Deeply In-the-Money Put Option Has Value

Summary

The document clarifies the payoff intuition for a put option. A put gives its holder the right to sell the underlying stock at the strike price. If the stock price falls far below that strike, the right to sell at the higher strike has substantial intrinsic value. In the example, a strike of $50 and stock price of $2 imply about $48 of intrinsic value per share, before any contract multiplier or other market details.

The question of who would buy the option is answered through market pricing: another trader may purchase the right if it is offered below its value, while an offer close to the full intrinsic value may attract little interest. The option holder does not need to find someone willing to take the exact opposite side at a particular price; bids and offers determine the executable price. This short explanation omits time value, exercise style, transaction costs, liquidity, and contract terms, all of which can affect actual option prices and execution.

Key ideas

• A put option gives its holder the right to sell the underlying asset at the strike price.
• When the stock is below the strike, the put has intrinsic value equal to the strike minus the stock price.
• A prospective buyer may pay less than intrinsic value, depending on the offered price and market conditions.
• Actual option pricing can also reflect time value, liquidity, and contract details.

Tags

# Really simple question regarding options. (Amateur level)


# Really simple question regarding options. (Amateur level)












I'm just starting to educate myself on trading and financial instruments and I have what to me seems like a somewhat stupid question but I'd like to pose it nontheless.

If I have an option to sell stock A at 50 dollars, and stock A plummets to 2 dollars during the duration of my contract, who would choose to buy my option? In my mind it represents a $48 loss, but I'm well aware that maybe I'm missing something. I appreciate the pacience and acknowledge that I'm an amateur when it comes to financial instruments.

## Answer by dm63 (score 2)

https://quant.stackexchange.com/a/46645

You have what is known as a put option (the right to sell the stock) . If the stock has fallen precipitously to 2 dollars, then the the option to sell at 50 is worth about 48 dollars. If you are asking who will buy it , then just about anyone will pay you 47 dollars for it. Hardly anyone will pay you 49 dollars. So the answer depends on what price you are offering it at.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.