put option

An option which gives the holder the right but not the obligation to sell shares (or other financial instrument) at a fixed price on or before a given date.

Every put option has an exercise price. This is the price at which the holder is entitled to sell the shares to the option writer. If the price of the share falls below the exercise price, the option is said to be 'in the money' and to have an intrinsic value which is equal to the difference between the two.

For instance, an option which entitles the holder to sell shares in XYZ at 80p has an intrinsic value of 8p if the price of XYZ's shares falls to 72p.

If the price of XYZ's shares rose to 90p, on the other hand, the put option would have no intrinsic value because it would not be in the holder's interests to sell the shares at 80p. The only value which the put option would then have would be its time value.