A put is a type of derivative contract. It's an option that allows an investor to make money when the price of an underlying asset falls. (It grants the right, but not the obligation, to sell the underlying asset at a pre-set price at a pre-set time.)
A put calendar involves taking a bunch of racy pictures of various puts and assigning each one to a different month. You should see Mr. April.
Just kidding, of course. No one wants to see a put naked. (Calls are much more shapely.) Rather, a put calendar involves using multiple puts of different duration. Like...filling in your calendar with various puts for the same underlying asset. So, in April, this one expires...in June, that one expires...etc.
If all the puts have the same strike price (the pre-set price where you have the option to sell them), it's referred to as a horizontal spread. Basically, you are spreading out your bets. If the underlying asset doesn't drop into the money by April, maybe it will be there by June.
You can also set up a put calendar with different strike prices. This strategy is known as a diagonal spread. It represents a bet that an asset will continue to move lower over time. It will be down a little bit by the expiration of April's put, but down even more by the time the June expiration rolls around.
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Finance: What Is a Put Option?83 Views
finance a la shmoop what is a put option? hot potato hot potato
ow ow! yeah remember that game well nobody wanted the potato, poor thing. the
players wanted to put it in someone else's hands. well put options kind [glue put around a flaming potato]
of work the same way. a put option is the right or option or choice to sell a
stock or a bond at a given price to someone by a certain end date.
all right example time. you bought netflix stock at the IPO a zillion years
ago at $1 a share. that's you know splits adjusted. all right now it's a hundred
bucks a share. if you sell it you pay taxes on a gain of 99 dollars a share. in
California that would be a tax of something like almost 40 bucks. well the
stock was a hundred but you keep only something like 60. feels totally unfair.
right so you really don't want to sell your stock but you're nervous about the [graph shown]
next few months that Netflix will crater for a while and go down ten
maybe twenty dollars. longer term though you think it'll hit 300. so this is the
perfect setup to maybe look at buying some put options on Netflix. if the stock
goes down your put options go up. with Netflix volatile but at a hundred bucks
a share ,you look up the price of an $80 strike price put option expiring in
December, and you know that's mid-september now .for five bucks a share
you can protect your stock for the next few months .think about it like temporary [stocks placed in vault]
term life insurance. you pay the five dollars a share in the stock goes down
to 82 by mid December, worst of all worlds. well not only did you lose the $5
a share but your stock has lost $18 in value. but had Netflix really cratered
and gone to say $60 a share well you would have exercised your put and sold
your shares at 80 bucks. well those put options you paid $5 for
would be been worth 15 bucks a share. in buying that put option you've [equation shown]
guaranteed that your loss will be no more than a $75 value for your Netflix
position at least for that time period and ignoring taxes. well remember that
options expire after December whatever like the third Friday of the month it's
usually when options expire, you then have no protection and your shares float
along naked. naked? really who knew accounting could get so [paper put option goes "skinny dipping".]
raunchy. yeah well that's naked put options.
that's what they really are people.
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A derivative of a security is a "something" which derives its value based on the performance of that security... either a put option or a call option.