Put Option
IntermediateA put option is a contract that gives its buyer the right, but not the obligation, to sell an asset at a set price, the strike price, on or before a specific date.
The buyer of a put pays a premium for the right to sell. They benefit if the price of the underlying asset falls below the strike price.
Suppose you buy a put option on a share with a strike price of 50, paying a premium of 2 per share. If the share falls to 42 by expiry, you can sell at 50, so the option is worth 8 per share. After subtracting the premium, your profit is 6 per share. Your break-even price is 48, the strike minus the premium.
If the share stays at or above 50, the put expires worthless and you lose the premium. The maximum loss for the buyer is the premium, while the maximum gain occurs if the share falls to zero.
Puts are often used for protection. An investor who owns shares can buy puts to limit potential losses, much like buying insurance. Puts can also be used to speculate on falling prices without short selling.
The seller of a put receives the premium but must buy the shares at the strike price if the buyer exercises, even if the market price is much lower.
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