What is a put option?
In one line: A put option is a contract that gives the buyer the right, but not the duty, to sell 100 shares at a set price before a set date.
A simple example
A stock trades at $50. You buy one put with a Strike price of $45 that expires in 2 months. The premium (the option's price) is $1.50.
One stock option usually covers 100 shares. So it costs $1.50 × 100 = $150.
Now picture expiry day:
- Stock at $40: the right to sell at $45 is worth $5 a share, or $500. Minus your $150, that's $350 ahead.
- Stock at $43.50: worth $1.50 a share, or $150. That's your break-even ($45 strike − $1.50 premium).
- Stock at $46: no one wants to sell at $45 when the market pays $46. The put expires worthless. You lose the $150.
A math example, not a promise. Before expiry, the put's price also changes with time left and how much the stock is moving.
Why it matters
Puts are used in 2 main ways:
- As a view that a stock will fall. It's a way to go short without borrowing shares.
- As protection. Someone who owns the stock can buy a put to set a floor under it, a bit like insurance.
For the buyer, the most you can lose is the premium. The full picture is in options trading basics.
A common mistake
Forgetting that time costs money. A put can be right about the direction and still lose. If the stock falls slowly, from $50 to $46 over 2 months, the $45 put still expires worthless.
The stock has to fall past the strike minus the premium, and before the date.
Buying a put caps your loss at the premium. Selling a put means you may have to buy the shares at the strike, even if they've fallen far below it.
Questions
When would you buy a put option?
When you think a stock will fall before a set date, or when you own shares and want to limit how much a drop can cost you.
What is the difference between a put and shorting a stock?
Shorting has no fixed limit on loss if the stock rises. Buying a put limits the loss to the premium, but it expires on a set date. See Long and short.
What happens if my put option expires out of the money?
It expires worthless. You lose the premium you paid and nothing more.
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