Put Option

What is a put option?

A put option is a contract that gives its holder the right, but not the obligation, to sell an underlying asset at a set strike price until expiration. A standard US equity put covers 100 shares with American-style exercise through expiration, and its expiration payoff grows as the stock falls below the strike. Other put contracts specify their own underlying, exercise schedule, and cash or physical settlement.

The buyer pays premium for those rights. The writer receives premium and takes the corresponding settlement obligation.

How does a put option work?

A standard equity put quoted at $3.00 costs $300 per contract. The premium multiplier converts quoted price into cash.

A put is in the money when the underlying is below the strike. Intrinsic value per unit is the greater of strike minus underlying price and zero. Premium also reflects time, implied volatility, rates, dividends, and the market’s bid and ask.

At expiration, a long put’s gross profit per unit is max(strike − underlying price, 0) − premium paid. Its breakeven is strike minus premium. For an equity underlying with a zero price floor, maximum gross profit per unit is strike minus premium when the stock reaches zero.

How do traders use put options?

Buy a put for downside exposure, pair it with shares for protection, or combine puts into a vertical spread. Compare the complete payoff and capital requirement. A higher strike has a larger expiration payoff than a lower strike at the same underlying price, while its premium determines the entry cost.

In options flow, read put execution price, size, premium, and related legs. Put buying adds negative put delta, including when it closes a short put. Combine the option exposure with stock and other legs to understand the full position.

Select the strike and expiration for the target and time horizon, then compare price and volatility scenarios in the options profit calculator to define the entry and exit.

Risks and limitations of put options

• Size a long put from its full premium. A put that finishes out of the money loses all of it: the 95 put finishing at $97 loses the full $300.
• Target the breakeven, not the strike. At $93 the put is $2 in the money and still loses $100, because it ends above the $92 breakeven.
• Track time and implied volatility along with price. Time decay and falling implied volatility reduce extrinsic value, so a put loses value while the stock falls whenever they outweigh the move.
• Plan the share position before you exercise. Exercise of a standard put sells 100 shares at the strike, and without shares in the account it leaves a short stock position with its own price exposure.
• The gain tops out at a zero stock price: the 95 put’s maximum gross profit is $92 per share, the strike minus the $3.00 premium.

Bottom line

Once XYZ falls below the $92 breakeven, each further dollar of decline adds $100 of profit, which is how an $84 close turned the $300 premium into an $800 gain. Match the strike and expiration to the move and timing you expect, and sell to close once the put reaches your target.