What Is Put Option?
A put option gives the buyer the right to sell 100 shares at a fixed strike price before expiration. Puts are used for speculation, hedging, and income strategies.
Definition
A put option is a contract that gives you the right to sell 100 shares at the strike price before expiration. If the stock falls below the strike, the put gains value. Put buyers profit when stocks fall — it's the inverse of a call option.
Puts are commonly used as insurance (protective puts) — if you own 100 shares of a stock, you can buy a put to cap your downside. If the stock crashes, your put gains value, offsetting losses on the shares.
Put sellers collect the premium and profit when the stock stays above the strike. Selling a cash-secured put is a popular income strategy that also creates a way to buy stock at a lower effective price.
Real-World Example
You buy a put on TSLA with a $200 strike for $5 ($500 total). If TSLA drops to $180, your put is worth at least $20 ($2,000). You've turned a $500 bet into a $1,500 profit. If TSLA stays above $200, the put expires worthless.
Why It Matters
Puts are the primary tool for hedging a portfolio or profiting from declining stocks without short selling — making them essential knowledge for any serious investor.
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Frequently Asked Questions
Is buying puts the same as short selling?
Both profit when a stock falls, but they're different. Short selling borrows shares and sells them, with unlimited loss potential if the stock rises. Buying puts caps your loss at the premium paid — there's no margin call or unlimited downside.
What is a protective put?
A protective put is buying a put on a stock you already own, acting as insurance. If the stock crashes, the put gains value and offsets your loss. It costs premium (like insurance), but limits downside risk.
When does a put expire worthless?
A put expires worthless when the stock price is above the strike price at expiration. The seller keeps the full premium as profit. For put buyers, this is the maximum loss scenario.
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