From the course: Behavioral Finance Foundations

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Put options and risk aversion

Put options and risk aversion

From the course: Behavioral Finance Foundations

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Put options and risk aversion

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- [Instructor] Put options are a type of investment that we can use to mitigate downside risk in stocks. In particular, they help us to deal with the problems of risk aversion and to avoid uncertainty in our investments. Let me show you a real-world example of using put options for this purpose. Now, I'm here on the Microsoft page on the CNBC website, and I want to take a look at options, so I'm going to go over to the Options tab and click on it. And when I do that, I can now scroll down. And I'm going to select Puts. And I'm interested in options that are expiring later in the next year. Now, a put option gives you the right, but not the obligation to sell a stock at a particular point in time for a particular price. So a put option might allow us to sell Microsoft at, say, a guaranteed price of $140 per share. Now, what do we pay for that right? In essence, the put option gives us the equivalent of a contingent…

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