Put On A Put

The right to sell a put...on a put.

Huh? How's that work?

Ever hear the expression “a hat on a hat?” Kind of the financial equivalent of that. Puts and calls are the basic vanilla contracts of options trading. Calls give the holder the right (but not the obligation) to buy some underlying asset (like a stock or commodity) at a pre-set price and at a pre-set time in the future. A put represents the opposite: the right (but not the obligation) to sell an underlying asset at a pre-set price and at a pre-set time.

Like putting ice cream on cake, you can stack these options as well. The process creates compound options. A put on a put counts as one of these (along with a call on a put, a put on a call, and a call on a call).

Compound options allow people to get involved in trades where they would otherwise not have the financial wherewithal. To sell an underlying asset (as the put gives the right to do), you need to have that asset in the first place. That can get expensive if you're talking about something like, say, shares of AMZN, which trade at about $1,900 a share. But a put or call option for that stock would be far less expensive. So...a put for a put option on AMZN would be cheaper to obtain, if you plan to exercise your right to sell it.