Put Option
A put option is the right to sell a stock at a locked-in price. Learn how a put makes money when a stock falls, your break-even and max loss, and when to use one.
A put option is the right to sell a stock at a locked-in price, before a deadline, for a small fee paid up front. You reach for a put when you believe the price is heading down, or when you want to protect something you own.
It is the mirror image of a call. A call is the right to buy. A put is the right to sell. Let me show you where it comes from with something you already pay for every year.
The Insurance Policy
You own a car worth $20,000. You do not expect to crash it. But if you did, replacing it would hurt. So you pay an insurance company a small premium, say $500 a year, for a promise: if your car gets totaled, they pay you its value.
If you never crash, that $500 is gone. You do not get it back. And honestly, you are happy about it, because it means nothing bad happened.
If you do crash, the payout dwarfs the $500 you spent. The insurance did its job.
A put option works exactly like that policy, except the thing you are insuring is a stock, and anyone can buy the protection, even people who do not own the stock at all.
So What Did We Just Learn?
That insurance policy is a put option, start to finish.
A put gives you the right to sell something at a locked-in price, before a deadline, for a small fee up front. You reach for a put when you believe the price is heading down. Here is the hook: you buy a Put when you expect the price to Plummet.
Every part of the policy has an options name.
Same detail as the call: one contract covers 100 shares. A put priced at $4 a share costs $4 times 100, which is $400 for the contract.
Watch a Put Make Money
Apple is trading at $200 a share, and this time you think it is heading lower over the next month. So you buy one put:
- Strike: $200, the price you lock in to sell at
- Premium: $4 a share, which is $4 times 100, or $400 for the contract
- Expiration: 30 days
That $400 is your full cost and the most you can lose. Now watch it play out.
Apple falls to $180. Your right to sell at $200 is now worth $20 a share, because you can sell at $200 something the market only values at $180. Across 100 shares, that is $2,000. Subtract the $400 you paid, and you keep $1,600.
Apple falls to $170. Your right to sell at $200 is worth $30 a share, or $3,000 across the contract. After the $400 premium, you keep $2,600.
Apple climbs to $210. Your right to sell at $200 is useless, because you would never sell at $200 what you could sell at $210 in the open market. You let the put expire, out only your $400.
Your Two Numbers: Break-Even and Max Loss
Max loss. Just the premium. Here, $400. No matter how high Apple climbs, that is the most you can lose.
Break-even. Apple dropping below $200 is not quite enough to profit, because you paid $4 a share for the put. You need Apple below $196 to truly come out ahead. That is your strike minus your premium: $200 minus $4. Notice the flip from a call. A call adds the premium to the strike, a put subtracts it, because a put profits on the way down.
The Two Ways People Use Puts
A put wears two hats, and it helps to know which one you are putting on.
As a bet. You do not own Apple, but you think it is about to fall. You buy a put, and if the stock drops, the put gains value. This is a pure directional trade, the mirror of buying a call.
As insurance. You own 100 shares of Apple and you are nervous about a rough month ahead. You buy a put as a floor under your shares. If Apple crashes, the put rises in value and offsets the loss on your stock. This version has its own name, the protective put, and it is exactly the car policy from the top of this page.
- You expect a clear move down
- Or you own shares and want a floor under them
- You want your risk capped at a known premium
- The stock may drift sideways
- You have no real deadline in mind
- You are simply bullish
- A put is the right to sell at a locked-in strike price before expiration.
- You buy puts when you expect the stock to fall, or to protect shares you own.
- Your max loss is the premium. Your break-even is the strike minus the premium.
- One contract controls 100 shares, so a $4 put costs $400.
Pop Quiz
Three quick questions to see what stuck. Pick an answer and the explanation shows up right away.
You buy a put. When does it make money?
A put is the right to sell, so it profits when the stock falls, once it drops past your break-even (strike minus premium).
You buy a $200 put and pay a $4 premium a share. What is your break-even price?
Break-even on a put is the strike minus the premium: $200 minus $4 is $196. The stock has to fall below that before you truly profit.
You own 100 shares and buy a put against them. What role is the put playing?
A put bought against shares you own is a protective put. If the stock crashes, the put rises and offsets the loss, exactly like car insurance.
Bottom Line
A put is the call flipped upside down. You pay a small premium for the right to sell at a locked-in price. If the stock falls past your break-even, your profit grows dollar for dollar. If it does not, you walk away having lost only the premium.
You buy a put when you believe the price is about to fall, or when you own shares and want a safety net under them. Either way, your worst case is known before you begin.
Keep going: the call option is the put's mirror, for when you expect a stock to climb. Or see how a put becomes a stock safety net with the protective put.