Put Option
Definition
A contract giving the holder the right, but not the obligation, to sell a specific asset at a predetermined price (strike price) before or on the expiration date.
A put option is essentially insurance against a price decline. If you own a stock at $100 and buy a $95 put option, you have the right to sell your shares at $95 regardless of how far the stock falls. If the stock drops to $70, your put lets you sell at $95 — limiting your loss to $5 per share plus the premium paid.
The put buyer pays a premium (the option's price) for this protection. If the stock stays above $95, the put expires worthless and you lose the premium. This is the maximum loss for a put buyer — the premium paid. The potential gain is substantial if the stock falls significantly below the strike price.
Put options serve several purposes: hedging (protecting existing positions from downside), speculation (profiting from expected price declines without short selling), and income generation (selling puts on stocks you'd like to own at lower prices).
Protective puts are the most straightforward use — buying a put on a stock you own creates a floor under your position. The cost is the premium, which functions like an insurance deductible. Portfolio-level hedging uses index puts (like S&P 500 puts) to protect an entire portfolio against market-wide declines.
Cash-secured puts are a popular income strategy. You sell a put at a strike price below the current stock price, collecting the premium. If the stock stays above the strike, you keep the premium. If it falls below, you buy the stock at an effective cost basis of the strike minus the premium — acquiring a stock you wanted at a discount.
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Related Terms
Frequently Asked Questions
How much does a put option cost?
Put premiums depend on: the stock price relative to the strike, time until expiration (more time = higher premium), the stock's volatility (more volatile = higher premium), and interest rates. A near-the-money put with 30 days to expiration might cost 2-5% of the stock price.
Should I buy puts to protect my portfolio?
Protective puts provide peace of mind but are costly if used constantly. The premiums can significantly drag returns in rising or flat markets. Consider puts selectively: around earnings announcements, during high-volatility periods, or when you have concentrated positions you can't sell for tax or other reasons.