Put Option
A put option is a contract that gives the buyer the right, but not the obligation, to sell 100 shares of an underlying stock at a specified strike price on or before the expiration date.
A put option is the mirror image of a call option. While call buyers profit from rising prices, put buyers profit when the underlying asset falls in value. Purchasing a put grants you the contractual right to sell 100 shares at the strike price, even if the market price has dropped well below that level. The maximum loss for the buyer is limited to the premium paid; the maximum gain is substantial — theoretically as large as the strike price itself if the stock falls to zero.
Put options serve two broad purposes on U.S. markets: speculation and hedging. A speculator who believes a stock is overvalued might buy put contracts rather than short-selling shares. Short selling requires a margin account and exposes the trader to theoretically unlimited losses if the stock rises instead. Buying a put caps the risk at the premium while still providing significant profit potential on a decline.
As a hedging instrument, puts act like insurance. An investor who holds 500 shares of a pharmaceutical company trading at $80 can buy five put contracts with an $80 strike. If the stock plunges to $55 on a failed drug trial, the puts provide the right to sell at $80, effectively offsetting the portfolio loss. This strategy — called a protective put — costs a premium but preserves the upside if the stock continues to rally.
American-style puts traded on the CBOE and other U.S. equity exchanges allow early exercise at any point before expiration. This feature is particularly valuable for deep in-the-money puts, where time value has eroded and an investor might prefer to exercise immediately rather than wait. Index put options (such as SPX puts) are typically European-style, exercisable only at expiration and settled in cash rather than shares.
Put sellers (writers) receive the premium in exchange for accepting the obligation to buy 100 shares at the strike price if assigned. Cash-secured put writing — where the seller holds enough cash to cover the purchase — is a popular strategy for investors who want to acquire shares at a discount. If the put expires worthless, they keep the premium as income; if assigned, they own shares at an effective cost basis reduced by the premium received.