Financial Glossary
Put Option
The right to sell: how puts protect against losses and profit from falling prices.
What is a Put Option?
A put option is a contract giving the holder the right (but not the obligation) to sell an underlying asset at a fixed price (the strike) before a specified date (expiration). You pay a premium upfront. Put buyers profit when the underlying falls below the strike minus premium. For example, if you buy a $100 put paying $2 premium, you profit when the stock falls below $98.
Puts are insurance: they protect against losses. If you own stock worth $100 and buy a $95 put, you're protected against falls below $95 (minus the put premium paid). If the stock crashes to $80, your put is worth $15, offsetting most of the stock loss. If the stock rises to $110, your put expires worthless, but you profit on the stock. Puts can also be bought for pure downside bets, leveraging price declines just like calls leverage rises.
Put Buyers vs. Put Sellers
Put buyers profit from falling prices and increasing volatility, and they can hedge stock holdings. Put sellers collect premium and profit if the stock stays flat or rises. Naked put selling creates assignment risk: if the stock falls below the strike, the seller is forced to buy 100 shares at the strike price. Selling puts is like collecting income but committing to buy the stock if prices drop.
Disclaimer: Put options involve leverage and can result in total loss of premium. Selling puts creates assignment risk and potential forced stock purchases. Before trading puts, consult a qualified financial advisor. Options involve substantial risk. Past performance does not guarantee future results.