Kindly give a basic idea of American Put option under derivatives?

Answer 1

A put option on an asset gives the buyer the right (but not the obligation) to make someone buy the asset from him at a preset price (called the strike price). These contracts expire on a certain day. A European Option only lets you force someone to buy the asset on the expiration date. An American option lets you do it any time up until the expiration date.

For example, suppose you own stock that has a price of $52.00 that has recently increased in value. You want to hold onto the stock in case it goes up more -- but are worried that if price falls, you will lose your profits. You could buy a put contract on this stock with a strike price of 50. If the stock price goes up more -- you let the option expire worthless. If the stock goes below $50, you can make someone buy the shares from you at $50.

Now -- let's take an extreme case. You buy these put contracts with a strike price of $50 that expire in one year. Something bad happens to the company and the stock drops to $5.00. If you have a European option, then the contract doesn't let you exercise for another year -- so the put is worth the present value of $45.00 -- say about $42.00. But if you have an American Option, you can exercise it immediately and get $45.00.

The term European and American have nothing to do with where the options originated. Most exchange traded options are American options. Most Over-The-Counter options (privately negotiated options) are European.

Answer 2

Tranto says it all and quite correctly. Put options can be used to buy stocks at a discount. Say you want JNJ and 60 is a good price. If you write a 60 put option and get a 1.50 premium for it you are buying JNJ at 58.50. Caution - you must have resources to pay 60 for the stock in case it goes down and the put owner wants to unload JNJ on to you. If JNJ goes up the 1.50 premium is free money for taking the risk.