Put Option
Quick Definition
A contract giving the holder the right, but not the obligation, to sell an underlying asset at a specified price within a specified time period.
What Is Put Option?
A put option is a financial contract that gives the buyer (holder) the right to sell an underlying asset at a predetermined price (strike price) on or before a specified date (expiration). The buyer pays a premium to the seller (writer) for this right. Put options increase in value when the underlying asset declines in price. Buyers of puts have profit potential down to zero in the underlying and risk limited to the premium paid. Sellers of puts collect premium but face substantial risk if the underlying drops significantly (max loss = strike price × 100 minus premium received). Puts are used for speculation on price declines, hedging long stock positions (protective puts), and income generation through put selling strategies (cash-secured puts, wheel strategy). Along with call options, puts are one of the two fundamental option types.
Put Option Example
- 1You buy a $50 put option on XYZ for $2. If the stock falls to $40, you can exercise to sell at $50, making $8 profit ($10 gain minus $2 premium)
- 2A fund manager buys SPY puts as portfolio insurance before an election, paying $5 per contract for the right to sell SPY at $430 even if the market crashes
Related Terms
Call Option
A contract giving the holder the right, but not the obligation, to buy an underlying asset at a specified price within a specified time period.
Strike Price
The predetermined price at which the holder of an option can buy (call) or sell (put) the underlying asset upon exercise.
Options Premium
The price paid by the option buyer to the seller for the rights conveyed by the contract, determined by intrinsic value, time value, and volatility.
Protective Put
A hedging strategy where a stockholder buys a put option to establish a price floor, protecting against downside risk while maintaining upside potential.
Cash-Secured Put
An options strategy where a trader sells a put option while holding enough cash to purchase the underlying stock if assigned.
Futures Contract
A standardized exchange-traded agreement to buy or sell an asset at a predetermined price on a specific future date, with daily mark-to-market settlement.
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