Put

What is a put option?

A put option is a financial contract that gives its buyer the right, but not the obligation, to sell a specific quantity of an underlying asset (for example, 100 shares) at a predetermined price (the strike price) on or before a specified expiration date. The buyer pays a premium for this right. The seller (writer) of the put receives the premium and takes on the obligation to buy the asset at the strike price if the buyer exercises the option.

Key components

• Strike price: The price at which the buyer can sell the underlying asset.
• Expiration date: The last date the option can be exercised.
• Premium: The price paid by the buyer to acquire the option.
• Intrinsic value (put): max(strike price − underlying price, 0).
• Time value: Portion of the premium above intrinsic value; declines as expiration approaches (time decay).

How puts work and how they gain value

• A put increases in value as the underlying asset’s price falls below the strike price.
• If the underlying price is above the strike price, the put has no intrinsic value and is “out of the money” (OTM).
• If the underlying price equals the strike price, the put is “at the money” (ATM).
• If the underlying price is below the strike price, the put is “in the money” (ITM), and its intrinsic value equals strike − underlying price.
• Time decay reduces an option’s value as expiration nears because the probability of moving ITM decreases.

Common uses

• Hedging (protective put): Investors who own a stock can buy puts to limit downside risk. If the stock falls, gains from the put offset some or all losses in the position.
• Speculation: Traders who expect a decline in an asset’s price can buy puts to profit from that decline with limited upfront capital (the premium).
• Income generation (writing puts): Selling puts collects premium income; the seller expects the asset to stay above the strike. If the asset falls below the strike, the seller may be assigned and must buy the asset at the strike price.

Example

An investor buys one put contract (covers 100 shares) on stock ABC with:
* Strike price = $10
* Current stock price = $12
* Premium paid = $100 (i.e., $1 per share)

If ABC falls to $8 before expiration:
* Intrinsic value per share = $10 − $8 = $2
* Contract intrinsic value = $2 × 100 = $200
* Profit after premium = $200 − $100 = $100

The buyer can either:
* Sell the put contract for its market value, or
* Buy 100 shares at $8 and immediately exercise the put to sell them at $10 (effectively capturing the $2 spread per share, minus the premium).

If the stock stays above $10 at expiration, the put expires worthless and the buyer loses the premium ($100).

Payoff profile (conceptual)

• Buyer of a put: Limited loss equal to the premium paid; potential gain increases as the underlying price falls (down to zero).
• Seller (writer) of a put: Gains limited to the premium received; faces potentially large losses if the underlying price drops significantly (because the seller may be required to buy at the strike).

Simple explanation (ELI5)

A put is like buying an insurance policy on a stock you own (or expect to profit from if it falls). You pay a small fee now to guarantee you can sell the stock at today’s price later. If the stock falls, the insurance pays off. If it doesn’t, you lose only the fee.

Frequently asked questions

Q: Is a put bullish or bearish?
A: Bearish. Buyers of puts profit when the underlying asset’s price falls.

Q: What is the downside of buying a put?
A: The maximum loss is the premium paid. If the asset doesn’t fall below the strike before expiration, the put expires worthless.

Q: What’s the difference between a protective put and a married put?
A: A protective put is a put used to hedge an existing long stock position. A married put is the specific situation where an investor simultaneously buys a stock and a put for that same stock as immediate downside protection.

Q: What obligation does the put writer have?
A: If assigned, the writer must buy the underlying asset at the strike price regardless of the current market price.

Bottom line

Puts are flexible derivatives used to hedge downside risk or speculate on price declines. Buyers have limited downside (the premium) and potential upside if the underlying falls; sellers collect premium but accept the obligation to buy at the strike if exercised. Understanding strike, expiration, intrinsic value, and time decay is essential before trading or using puts as part of an investment strategy.