Put option.
In plain English
A put option is the mirror of a call. The buyer pays a premium and gains the right (not the obligation) to sell 100 shares at the strike price any time before expiration. If the stock falls below the strike, the put gains value. If the stock stays above the strike at expiration, the put expires worthless. Each listed contract represents 100 shares.
01Why it matters
Puts are used three ways: as portfolio insurance (buy a put on stock you own to lock in a floor sale price), as a directional short bet (buy puts on stocks you expect to fall), and as income (sell cash-secured puts to potentially buy a stock cheaper than today's price).
02The math, step by step
The stock trades at $100. You buy a $95 put for $2 (one contract costs $200). If the stock falls to $85 by expiration, intrinsic value is $10 per share and the contract is worth $1,000. Net gain on a $200 outlay: $800. If the stock stays at $95 or above at expiration, the put expires worthless and you lose the $200.
03What this is NOT
A put option and shorting a stock both profit when the stock falls, but the loss profile differs. A put has a defined maximum loss equal to the premium paid. A short sale has theoretically unlimited loss potential if the stock rises sharply.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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