Put Option

A put option is a contract that gives the buyer the right, but not the obligation, to sell 100 shares of an underlying stock at a specified strike price on or before a set expiration date. The buyer pays a premium for this right, while the seller (writer) of the put takes on the obligation to buy shares if assigned.

Why It Matters

Put options are the primary tool for bearish speculation and portfolio protection. Buying a put is the options equivalent of shorting a stock, but with defined risk — the most you can lose is the premium paid. For portfolio hedging, puts act as insurance: they gain value when stocks drop, offsetting losses in your share holdings.

For sellers, writing puts is a popular income strategy and a way to acquire stock at a discount. If you sell a put at a strike price where you would be happy owning the stock, you either collect the premium if the stock stays above the strike, or buy shares at an effective cost below the current market price.

How It Works

When you buy a put, you profit when the stock falls below the strike price. The put gains intrinsic value dollar-for-dollar as the stock drops below the strike. If the stock stays above the strike through expiration, the put expires worthless.

Key mechanics:

• Buyer (long put): Pays premium, has the right to sell shares. Maximum loss is the premium. Maximum gain occurs if the stock goes to zero (strike price minus premium, times 100).
• Seller (short put): Collects premium, has the obligation to buy shares. Maximum gain is the premium collected. Maximum loss occurs if the stock goes to zero.

Factors that increase a put's value:

• Stock price falling (puts have negative delta)
• More time to expiration (more time value)
• Rising implied volatility

Factors that decrease a put's value:

• Stock price rising
• Time passing (theta decay)
• Falling implied volatility

Puts have negative delta, meaning they move inversely to the stock. An ATM put with a delta of -0.50 gains approximately $0.50 per share for every $1 the stock drops. Deep ITM puts approach a delta of -1.0, moving nearly dollar-for-dollar with stock declines.

Quick Example

Stock DEF trades at $80. You buy the $78 put expiring in 45 days for $2.00, costing $200 per contract. Your breakeven at expiration is $76.00 ($78 strike minus $2.00 premium).

If DEF drops to $70 at expiration, your put is worth $8.00 in intrinsic value. Your profit is $8.00 - $2.00 = $6.00 per share, or $600 per contract — a 300% return. If DEF finishes at $80 or higher, the put expires worthless and you lose $200.

Alternatively, if you sold that $78 put for $2.00, you collect $200 immediately. If DEF stays above $78, you keep the full premium. If DEF drops to $74, you are assigned shares at $78 but your effective cost basis is $76.00 ($78 minus $2.00 premium).