Put Option

Puts provide protection against adverse exchange rate movements. In return for this protection, the client pays a premium for the option. If the option is exercised, there is physical delivery of the underlying currency.

A Put gives its holder the right to sell a given quantity of a currency in return for another currency at a predetermined strike price, at a future date (European style Call) or until a future date (American style Call). At expiry, the holder of the Put has unlimited upside potential if the spot rate is lower than the strike price. If it ends up higher than the strike price, the Put is not exercised and the loss is limited to the amount of the option premium.

Long Put

Payoff Diagram:

Direction Assumption: Bearish

Maximum Profit: Unlimited

Maximum Loss: Limited to Premium paid

Breakeven Price: Strike Price - Premium paid

Theta: Passage of Time -> Negative Effect The time value of the Long Put's premium, which the holder has "purchased" by paying for the option, generally decreases or decays with the passage of time. Theta decrease accelerates as the option contract approaches expiration.

Volatility: If Volatility increases -> Positive Effect. If Volatility decreases -> Negative Effect.

Short Put

Payoff Diagram:

Direction Assumption: Bullish

Maximum Profit: Limited to Premium received

Maximum Loss: Unlimited

Breakeven Price: Strike Price - Premium received

Theta: Passage of Time -> Positive Effect The time value of the Short Put's premium, which the option seller has "collected" by selling the option, generally decreases or decays with the passage of time. Theta decrease accelerates as the option contract approaches expiration.

Volatility: If Volatility increases -> Negative Effect. If Volatility decreases -> Positive Effect.