Options & Derivatives
Put Option
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How does a put option work?
A put option gives its buyer the right to sell an underlying asset at the strike price before or at expiration, depending on the contract. The buyer pays a premium for that right. The seller receives the premium and accepts the obligation to buy if the option is exercised. Standard U.S. equity-option contracts usually represent 100 shares, although investors should verify each contract's specifications.
Put option example
Suppose a stock trades at $50 and one put contract has a $45 strike price. If the stock falls to $35, the put has $10 per share of intrinsic value before accounting for the premium and transaction costs. If the stock finishes above $45 at expiration, the put can expire worthless and the buyer can lose the entire premium.
| At expiration | $45-strike put |
|---|---|
| Stock at $55 | Expires out of the money |
| Stock at $45 | At the money |
| Stock at $35 | $10 per share intrinsic value |
Buying versus selling a put
A put buyer has a right and generally risks the premium paid. A put seller has an obligation and may face a much larger loss if the underlying falls sharply. The SEC's Investor.gov options bulletin explains that option buyers can lose their full premium and some option-writing strategies carry substantially greater risk.
Why investors use put options
Investors may buy puts to hedge shares they already own or to take a defined-risk bearish position. Put prices are influenced by the underlying price, strike price, time remaining, implied volatility, interest rates, and expected distributions. A correct directional view can still lose money if the move is too small, arrives too late, or was already reflected in the premium.
Example
Buying a put with a $50 strike lets you sell the stock at $50 even if it crashes to $30, capping your downside.
Related terms
Put Option — FAQ
What is Put Option?
A put option is a contract giving the buyer the right, but not the obligation, to sell an asset at a set price before a specified expiration date.
Can you give an example of Put Option?
Buying a put with a $50 strike lets you sell the stock at $50 even if it crashes to $30, capping your downside.
What happens when you buy a put option?
You pay a premium for the right to sell the underlying asset at the strike price during the contract's permitted exercise period. You are not required to exercise it.
What is the maximum loss when buying a put?
For a straightforward long put, the maximum loss is generally the premium paid plus transaction costs if the option expires worthless.
When does a put option make money?
At expiration, a long put is profitable only when its intrinsic value exceeds the premium and costs paid. Before expiration, time value and implied volatility also affect its market price.
Is buying a put the same as short selling?
No. Both can benefit from a decline, but a long put has an expiration date and usually limits the buyer's loss to the premium. A short stock position has different borrowing, dividend, margin, and loss characteristics.
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