If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked.

# American put options

Unlike European option, an American options can be exercised at any point before it expires. In this video we walk through the process of exercising an American put option. Created by Sal Khan.

## Want to join the conversation?

• When you exercise a put option and make profit on it, who is buying this stock that you are selling at a higher price than it's now worth?
• The writer of the option HAS to buy the stock from you at this price. While it's an OPTION for the buyer, it's an OBLIGATION for the writer of that option. So you can choose to exercise or not but when you do the writer has to abide by it. What does the writer gain from all this? Well, the premium (price) you paid for that option.
• So isnt this just two people making a bet on what a stock does, up or down? The one issuing the option wants it to go up, the one buying wants it to go down. So its just two people making a bet?
• What's the economic value of this? this just seems like an instrument for gambling..haha. Please do correct me if I've misunderstood this.
• Well it could be seen like gambling, but this contracts are made about 400 years or more to insurance crops. It began with agriculture. Imagine this: A farmer have a crop and in September have usually 200 ton of cereals, and the market price usually is between 100 to 125\$ per ton along the years. Now is June (3 months to the harvest), the weather is fine and the perspective is 200 tons in September. A miller goes to the farmer and say: "I would like to offer you a deal, I would like to have the right to buy 50 ton in September at 100\$. For that I pay you now 5\$ per ton, that is 250\$ for that right". The farmer says: "Ok, I accept that, and writes a call option to September at 100\$ per ton". It's good to the miller because have a guarantee that will have a good price in September, and is good to the farmer because have 25% of the crop sold in June. I hope it helps to see the origin of options and futures, that was not gambling. Now we gamble, but we should remember that are real people behind companies. Any doubt just ask.
• I am assuming that Put or Call option prices vary according to the stock prices (for example, berkshire hathaway options would probably be much more expensive than options for stock trading at 10\$). So my question is, is there a specific formula for calculating those option prices? And if so, what is that formula?
• Option prices on higher priced stocks are more "expensive" (not really the correct term, explained later) than that on lower priced ones. Reason being, if a stock was trading at \$10 the strike prices would most likely be in \$0.50 increments (i.e. \$10, \$10.50, \$11, etc...). Therefore the intrinsic value between them (if they're ITM) would be \$50/contract. A higher priced stock, say at \$900, would have strike prices in \$5 increments (i.e. \$900, \$905, \$910, etc...). Those would have an intrinsic values (again, if ITM) of \$500/contract between strikes.

It also has to do with the movement of the stock. A 5% move in a \$10 stock is \$0.50 or about \$50 if you have a deep ITM option. The same 5% move in a \$900 stock is \$45 or about \$4500 if you have a deep ITM option.

The better way to see if an option is truly "expensive" is to look at its implied volatility and see how it relates to its past volatility and current volatility, but that's a different discussion altogether.
(1 vote)
• What if I buy a call and put option at the same time? Have I secured a risk-free profit in volatile stock market?
• How do know you will have a profit? You just spent money to buy the call and the put. If the stock stays where it is, they will both expire worthless. If the stock moves either direction, one of them will expire worthless. Whether you profit depends on the prices you paid and the movement of the stock. So was there a risk free profit? Definitely not.
• I'm curious about the people who are "renting" out their shares (the people putting their shares up for the puts and calls). Is there a video on who can do this and how it is done? I think it sounds like a great way minimize risk for a stock holder if I'm understanding it correctly.
• actually there isnt any renting at all, those selling options merely make an agreement with the purchaser of the option and go and buy the shares at going market prices at the exercise date, or just pay out the profit from option price and current market prices. hope that was helpful.
• How can you buy and sell put options? I am having trouble grasping that.
• Owning an option means that you have a right to buy (call) or sell (put) a stock for a specified price for a specified amount of time. Selling an option means you exchange that right for cash. That is, someone wants to buy your option, and they pay you for the put or call contract. You would sign some agreement that transfers the call or put right and contract to them, and they then pay you. They could go to the market and buy a new call or put contract, but instead they buy your contract from you. The details of your call or put agreement probably can't be purchased on the open market any more because time has passed, and confidence in the company has changed for better or worse.
• So, what happens step by step if the stock goes down (like I want it to)?

1. I buy a put option for \$5 with a strike of \$40
2. Stock goes down to \$20 by the expiration date
3. I can sell the option or the stock back the issuer for \$40.
Whose stock am I selling? Is it the person who issued the stock's stock? So, I'm selling the stock to the owner of the stock?