Glossary
Put option
A contract giving the buyer the right, but not the obligation, to sell 100 shares of a stock at a set strike price before expiration.
On this page
A put option is a contract that gives its buyer the right, but not the obligation, to sell an asset at a fixed price, the strike, on or before a set expiration date. The buyer pays a premium for that right. Puts gain value when the underlying price falls, so they are used both to bet on declines and to insure stock positions against losses. The seller, or writer, of the put collects the premium and takes on the obligation to buy the shares if the holder exercises.
How it works
A standard US equity option covers 100 shares, so a premium quoted at $2.20 costs $220 per contract. At expiration, a put's value is whatever it is in the money, if anything:
The seller of that put has the opposite outcome: a maximum gain of $160 and a potential loss of up to $4,640, the $4,800 strike value minus the $160 premium, if the stock went to zero.
How puts are used
- Hedging. Owning a put on stock you hold caps your downside. See Protective put.
- Speculation. Buying puts lets a bearish trader risk only the premium, unlike Short selling, whose losses are open-ended.
- Income or entry. Selling a Cash-secured put collects premium and, if assigned, buys the stock at an effective price of strike minus premium.
Before expiration, a put's price also includes Time value, which shrinks as the date approaches, and it rises when Implied volatility increases.