Put Option

A put option is an options contract that gives its buyer the right, but not the obligation, to sell a specified quantity of an underlying security at a fixed strike price, on or before the contract's expiration date. The Securities and Exchange Commission's investor education states the buyer's side of it in one sentence: a put option "is a contract that gives the buyer the right to sell shares of an underlying stock at the strike price for a specified period of time." The seller of that same contract, in exchange for the premium received, is obligated to buy the underlying at the strike if the buyer exercises.

This page covers the right to sell specifically. The mechanics shared with every options contract, contract size, expiration, and how the premium prices in time and expected movement, are covered on our page for options contracts and are not repeated here. The mirror position, the right to buy, is covered on our page for the call option.

In-the-money runs in the opposite direction from a call, and stating it the wrong way inverts the whole page. The SEC's rule for puts is the mirror image of the rule for calls: a put option is in-the-money "if the strike price is above the actual stock price," and out-of-the-money "if the strike price is below the actual stock price." At-the-money again describes the strike and the current price sitting at the same level. A put's intrinsic value, like a call's, is zero unless the option is in-the-money.

A put buyer's maximum loss is capped exactly the way a call buyer's is, because the mechanism is the same: a right, not an obligation. The buyer pays the premium once and can lose no more than that if the right expires unused. What differs is the direction of the bet: a put pays off as the underlying falls, so buying one is generally either a wager that the price will drop, or a way to protect an existing holding against a drop, a use commonly called a protective put. Buying a put on shares already owned works like an insurance policy: it costs the premium, and it puts a floor under how much the position can lose, because the holder can always sell at the strike regardless of how far the market price has fallen.

A put writer's loss is large but bounded, and the bound is set by the fact that a stock cannot fall below zero. A writer who sells a put receives the premium as the most they can make, and if assigned, must buy the underlying at the strike even if the market price has fallen far below it. The worst case is the stock going to zero, in which case the writer has paid the full strike price for something worth nothing, a large loss but one with a defined floor, unlike an uncovered call writer's exposure to a stock's unlimited upside. Selling a put is therefore sometimes used deliberately by an investor who is willing to buy the underlying at the strike price anyway, treating the premium received as compensation for making that commitment.

Breakeven runs the opposite direction from a call as well, and it is worth printing as a number for the same reason. For a put buyer, breakeven is the strike price minus the per-share premium paid, and the position is profitable only below that level, not merely below the strike. As with a call, the premium quoted on an options screen is a per-share figure, while the dollar amount actually paid for a contract is that premium multiplied by the contract's size, ordinarily 100 shares for a listed equity option.

A buyer pays a premium to a seller for the right to sell a set quantity of the underlying at the strike price on or before expiration. If exercising is worth doing, the buyer sells at the strike regardless of how low the market price has fallen, and the seller must buy; if not, the contract expires and the seller keeps the premium.

A hypothetical illustration of breakeven, printed as numbers throughout. Suppose a put option on a stock has a strike price of $40.00 and is quoted at a premium of $2.50 per share. One contract, covering 100 shares, costs $250.00 before fees ($2.50 × 100). The buyer's breakeven is the strike minus the per-share premium: $40.00 − $2.50 = $37.50. Above $37.50 at expiration the position loses money; below it, the buyer is ahead, and the maximum possible gain is capped at $37.50 per share (achieved only if the stock falls all the way to zero), while the maximum loss is capped at the $250.00 paid.

A hypothetical illustration of the protective-put use. Suppose Ines owns 100 shares bought at $40.00 each, worth $4,000.00 at that price, and buys the same put described above for $250.00. If the stock falls to $25.00, her shares alone would be worth $2,500.00 (100 × $25.00), a loss of $1,500.00 from the $4,000.00 they were worth at the $40.00 strike. But the put lets her sell at $40.00 regardless of the market price, so her loss on the combined position (the shares plus the put) is limited to the $250.00 premium paid for the put, rather than the $1,500.00 loss the shares alone would show. All figures are illustrative and ignore fees.

Pros

• A buyer's maximum loss is known in advance and limited to the premium paid, regardless of how far the underlying falls.
• Used as a protective put, it puts a floor under an existing holding's losses for the cost of the premium, without requiring the holder to sell the shares.
• A writer's maximum loss, unlike an uncovered call writer's, is bounded, because the underlying cannot fall below zero.
• The right, the strike, and the expiration are standardized and published, so the terms can be read rather than negotiated.

Cons

• Time works against a buyer even if their view turns out to be right, because the time-value portion of the premium erodes as expiration approaches.
• A protective put costs money every time it is bought, which is an ongoing drag if the feared decline never happens.
• A put writer can be obligated to buy a falling stock at a strike well above where it now trades, tying up capital in a position they may not have chosen at that price otherwise.
• The direction of "in-the-money" and breakeven runs opposite to a call, and mixing up the two produces the wrong conclusion about whether a position has value.