Put option

A put option gives the buyer the right, but not the obligation, to sell 100 shares of an underlying stock at a specific price (the strike price) before or on the expiration date. The seller of the put is obligated to buy those shares at the strike price if the buyer exercises.

Put buyers pay premium. Put sellers collect premium and take on the obligation to purchase stock if assigned.

How a put option works

Buying a put is a bearish position. You profit if the stock falls below your strike price before expiration. Puts are also commonly used as portfolio insurance. A protective put on a stock you own limits your downside if the position moves against you.

Selling a put is a neutral-to-bullish position. You collect premium and profit if the stock stays above your strike at expiration. If the stock falls below your strike, you may be obligated to buy it at that price, which is the basis of the cash-secured put strategy.

Profit and loss at expiry

• Put buyer profits when: stock price < strike price − premium paid
• Put buyer's max loss: premium paid
• Put seller profits when: stock price > strike price − premium collected
• Put seller's max loss: substantial, the stock can fall to zero (mitigated by the premium collected)

Real example

NVDA is trading at $120. You buy the $110 put expiring in 30 days for $2.50 per share ($250 per contract).

• Your breakeven: $110 − $2.50 = $107.50
• If NVDA drops to $95 at expiry: profit = ($110 − $95 − $2.50) × 100 = $1,250
• If NVDA stays above $110 at expiry: put expires worthless, loss = $250

When to buy puts

• You're bearish on a stock and expect it to decline
• You want to hedge an existing long position (protective put)
• You want limited, defined downside risk (max loss = premium paid)

When to sell puts

• You're willing to own the stock at a lower price (cash-secured put)
• You believe the stock will hold above a certain level
• IV is elevated and you want to collect inflated premium on a stock you'd be happy to own

Puts as portfolio insurance

One of the most practical uses of puts is hedging. If you own 100 shares of AAPL and are worried about a short-term decline, buying a put gives you the right to sell at a fixed price, capping your downside while keeping your upside exposure intact. Think of it as paying for insurance on your position.

Related terms: Call option, strike price, premium, cash-secured put, protective put, delta, assignment