What does a 'put option' allow the holder to do?

A put option is a financial contract that provides the holder the right, but not the obligation, to sell a specified quantity of an underlying asset at a predetermined price, known as the strike price, within a specified time frame. This option is primarily used as a hedging strategy or a way to capitalize on expectations that the price of the underlying asset will decline.

When an investor holds a put option, they can sell the underlying asset even if the market price has fallen below the strike price, thus enabling them to mitigate losses or generate profits in a bearish market. The ability to sell at the strike price protects the holder from unfavorable price movements, making the put option a key tool for managing risk in financial markets.

In contrast, the other options do not accurately describe the function of a put option. For instance, the right to buy an asset at a specified price pertains to a call option, while taking ownership of an asset with no obligation doesn't reflect the nature of options, which are agreements tied to the underlying assets. The concept of exchanging one asset for another could refer to swaps or other derivatives, but it is not relevant to how put options function. Thus, acknowledging the protective and speculative features of a put option clarifies why the correct choice