Put Options
A put option gives the holder the right to sell a stock at a specified price, providing profit from declines or portfolio protection.
A put option is a contract that gives the buyer the right, but not the obligation, to sell 100 shares of the underlying stock at the strike price before expiration. Put buyers profit when the stock price falls below the strike price minus the premium paid. Put sellers (writers) collect premium and profit when the stock stays above the strike price, but face significant risk if the stock plummets.
AAPL is trading at $190. You buy a $180 put expiring in 60 days for $4.00 ($400 total). If AAPL drops to $160, the put is worth $20 ($2,000), giving you a $16 profit per share ($1,600). If AAPL stays above $180, the put expires worthless and you lose the $400 premium. The breakeven is $176 ($180 - $4). Put options become more valuable as volatility increases, time to expiration extends, and the stock price declines.
Put Buying Strategies
Traders buy puts for three main reasons. Speculation: betting on a stock's decline. For example, if you expect TSLA to drop from $250 following disappointing delivery numbers, buying a $240 put could profit from the move. Hedging: protecting a long stock portfolio. A portfolio of $100,000 in SPY could be hedged by buying SPY puts at a strike that defines your maximum acceptable loss. Income: selling cash-secured puts is a way to generate income while potentially buying stocks at a discount. Each use case requires different strike and expiration selection.
Put Selling Strategies
Selling puts (also called writing puts or cash-secured puts) involves collecting premium in exchange for the obligation to buy shares at the strike price if assigned. The seller must have sufficient cash to cover the purchase. For example, selling a $170 put on AAPL for $3.00 means you collect $300 and must buy 100 shares at $170 if AAPL falls below that level. Your effective purchase price is $167. This strategy works well when you're neutral to bullish on a stock and want to generate income or acquire shares at a discount.
FAQs
What is the maximum loss on a long put?
The maximum loss is the premium paid. If you buy a put for $4.00 and the stock stays above the strike, the put expires worthless and you lose $400 per contract. You cannot lose more than the premium.
Can puts be exercised early?
Yes, American-style puts can be exercised at any time before expiration. Early exercise typically occurs when the put is deep in-the-money and has little time value remaining, making it advantageous for the holder to exercise and capture the intrinsic value.
How does time decay affect puts?
Like all options, puts lose value as expiration approaches (theta decay). An at-the-money put with 60 days to expiration will lose roughly half its time value in the final 30 days. Put sellers benefit from time decay; put buyers are hurt by it.