Put Option

Option giving the right to sell an asset at a strike price before expiration.

A put option is a financial contract that gives its buyer the right, but not the obligation, to sell a specific underlying asset—such as a stock, index, or commodity—at a predetermined price (the strike price) within a specified timeframe. The seller of the put option, on the other hand, is obligated to buy the asset at that strike price if the buyer decides to exercise the option. For this right, the buyer pays the seller an upfront fee called a premium. Investors typically buy put options when they expect the price of the underlying asset to fall, or when they want to protect an existing stock portfolio against potential declines (a strategy known as a protective put). If the market price of the stock drops below the strike price, the put option becomes "in the money," allowing the holder to sell the stock at the higher strike price or sell the option itself for a profit. If the stock price remains above the strike price until expiration, the option expires worthless, and the buyer's loss is limited to the premium paid. While buying puts offers capped risk and leveraged downside exposure, selling (or writing) put options carries different risks. Put sellers collect the premium upfront but take on the obligation to buy the stock at the strike price if it falls. This can result in significant losses if the stock price drops to zero. Investors must also be mindful of time decay (theta), which reduces the value of an option as it approaches its expiration date, and changes in implied volatility, which can dramatically affect option pricing.

An investor owns 100 shares of Company XYZ, currently trading at $50 per share. To protect against a market downturn, they buy one put option contract (representing 100 shares) with a strike price of $45 for a premium of $2 per share, costing a total of $200 ($2 x 100). If the stock price crashes to $35, the investor can exercise the option to sell their shares at $45. The net selling price is $43 per share ($45 strike minus the $2 premium paid), preventing further losses below $45.