This article explains how put-options work and when a person would benefit from entering into an agreement to grant one.
To explain put-options, we shall first explain option agreements.
Option agreements
A standard or regular option agreement is a right to buy within the option period, exercisable by the prospective purchaser, if they so desire. The land or asset owner is obliged to sell, if the buyer of the option exercises his right – that is, decides to purchase. For example, if you have a piece of land and want to sell it, you could contract with me, using an option agreement to sell. If I exercise my right under the agreement, you must sell it. If I do not exercise my right to buy, you do not have to sell – to me or anyone else.
An option gives its holder the right to buy or sell an asset at a price that is either fixed or calculated according to a pre-arranged formula or a fixed price.
Options can be for any asset – the most common asset is a financial security (for example, shares or bonds), or a commodity, or quite frequently, land. Net Lawman has option agreements for real property, intellectual property and commodities. Please see the end of this article for links to those agreements.
Put options
An option which gives the buyer the right to buy an asset is a call option. An option which gives the buyer the right to sell an asset is a put option. The asset the option is called the underlying asset. The price at which the underlying security is to be bought or sold is called the strike price or exercise price.
A put option is an obligation on the buyer to buy within the option period (exercisable by the vendor who has paid the prospective purchaser a sum to take the obligation to buy).
Options are closely related to futures contracts, but they give a holder the upside without the downside risk. Because this means that the writer takes the risk but foregoes the opportunity to profit. This means the writer needs to be compensated for taking the risk, and they are worth more to the holder.
Put options do not create an interest in the land and so are not registerable at HM Land Registry.
Buying a put option: market strategy
Buying a put option for speculative purposes would enable you to profit in a falling market.
The versatility of options also means that certain option strategies will enable you to profit in a static market. Selling a put option, for example, when you feel that the underlying land price will remain stable or at least not fall dramatically, allows you take in premium income. As the option nears expiry, the time value of your short put will be eroded and if, as you forecasted, the underlying price has not moved sharply, you will be able to close out your short put position at a cheaper premium than that at which you sold to open the position, thus benefiting from a profit.
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