Tag Archives | stock price

Put Option

See Also:
Call Option
Synthetic Stock
Future Value
Intrinsic Value – Stock Options
Purchase Option

Put Option Definition

A put option is the right for an investor to sell an asset at a pre-determined exercise price on a certain date known as the put option expiration.

Put Option Explained

A put option gives a holder or investor the ability to make an essentially risk free profit if the market fluctuates correctly. The holder of an option can simply look into the market without taking any real part in it. The benefit for a put option holder comes if the stock price does not exceed the put option price. Therefore, the lower the better for the put option holder because he is selling into the market. A put is exercised only if the holder can deliver an asset that is worth less than the exercise price.

Put Option Example

Jim has received a put option with the right to sell 100 shares of Wawadoo Inc. at a price of $35 by December. The current month is January, and the current stock price is $32. Jim could exercise the put now, but he believes that the market will drive the Wawadoo stock further down. By November, the stock has dropped to $28. Jim exercises his option and makes a profit of $700 (($35*100) – ($28*100)). If the price had increased throughout the year and went above the put option exercise price then Jim would have simply let his option expire. By doing this Jim has not gained anything or lost anything, except the potential where he could have exercised the put at the beginning of the year.

put option definition

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Price to Book Value Analysis

Price to Book Value Analysis Definition

Price to book ratio analysis (PBV ratio or P/B ratio) expresses the relationship between the stock price and the book value of each share. In general, the lower the PBV ratio, the better the value is. However, the value of the ratio varies across industries. A better benchmark is to compare with industry average.

Price to Book Value Analysis Formula

Use the following price to book value analysis formula:

Price to book value = Market Cap ÷ book value

Calculation

Book value is the value of the company if you subtracted all liabilities from assets and common stock equity.

For example, assume $ 20,000 in market cap and $ 10,000 in book value.

Price to book value = 20,000 / 10,000 = 2

As a result, investors pay $2 for every dollar of book value that a company has.

Applications

Price to book value ratio measures whether or not a company’s stock price is undervalued. The higher the ratio, the higher the premium the market is willing to pay for the company above its hard assets. A company either is undervalued or in a declining business if the value of 1 or less. Although investors use price to book value ratio to get some idea of how expensive a company’s stock is, it provides very limited information for some industries with hidden assets, which are of great value but are not reflected in the book value.

Resources

For statistical information about industry financial ratios, please click the following website: www.bizstats.com and www.valueline.com.

Price to Book Value Analysis

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Price to Book Value Analysis

See Also:
Price Earnings Ratio
Price to Sales Ratio
Financial Ratios

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