Put Option
A put option is a contract giving the buyer the right, but not the obligation, to sell 100 shares of the underlying at a fixed strike price before expiration.
A put gains value as the underlying falls below the strike, so traders buy puts for downside exposure or to hedge shares they own. Each contract covers 100 shares.
The put buyer’s risk is limited to the premium paid; the put seller is obligated to buy shares at the strike if assigned, which is how cash-secured puts acquire stock at a discount.
Example. Buying one 100-strike put for $2.50 costs $250. If the stock drops to $90, the put is worth $10.00 ($1,000) — a $750 gain before fees.
FAQ
How does a put option make money?
A long put profits when the underlying falls below the strike minus the premium paid; it can also offset losses on shares you own as a hedge.
What is the maximum loss on a long put?
The most you can lose is the premium paid — $250 for a $2.50 put.
Related terms
See also: Cash-Secured Put