Learn options · plain language
What is a put option
A put option is the right to sell a stock at a price you fix today, any time before a date you fix today. You pay for that right up front.
It is the mirror of a call. A put gains when the stock falls, because the right to sell above the going rate is worth something. If the stock stays up, nobody wants the right to sell low, and the put expires worthless.
Two very different reasons to own one
The first is a view: you think the stock falls, and a put gives you that exposure with a loss capped at the premium rather than the open risk of shorting.
The second is protection: you already own the shares and you want a price you can always sell at. That is closer to insurance, and like insurance it costs something every period whether or not you use it.
What it is worth at expiry
At expiry a put is worth the strike less the stock price, when that is positive, and zero otherwise. A $50 put with the stock at $44 is worth $6 per share, so $600 for one contract.
Break-even is the strike minus the premium. A $50 put bought for 2.00 does not profit until the stock is below $48.
The maximum gain is not unlimited
A stock can only fall to zero, so a put has a ceiling: the strike less the premium, times 100. A $50 put bought for 2.00 can make at most $4,800.
This is the clearest difference from a call, where the upside has no arithmetic limit.
Selling a put
If you sell a put you receive the premium and take on the duty to buy the shares at the strike. If the stock falls well below it, you are buying at a price nobody else wants.
The most you can make is the premium. The most you can lose is the strike less the premium, which on a $50 strike is $4,800 per contract. It is not unlimited, but it is large relative to the credit.
A worked example
| Stock today | $52 |
|---|---|
| Contract | One $50 put, 2.00 premium |
| What it cost | $200 |
| Break-even | $48 |
| Stock at expiry: $42 | Worth $800, net +$600 |
| Stock at expiry: $49 | Worth $100, net -$100 |
| Stock at expiry: $55 | Worthless, net -$200 |
| Maximum possible gain | $4,800, if the stock goes to zero |
The stock fell three dollars in the second row and the position still lost. Direction was right, size of move was not.
Run the numbers in the options profit calculator, free and with no sign-up.
Where this goes wrong
Treating a protective put as free
It costs premium every time you roll it. Bought continuously, that cost compounds and can exceed the drawdown it was bought to avoid.
Selling puts on something you would not want to own
Selling a put is agreeing to buy. If you would not buy the stock at the strike willingly, the credit is not the point of the trade.
Expecting a put to track the stock one for one
It does not. Delta changes as the stock moves and as time passes, so a one dollar fall rarely produces a one dollar gain.
Common questions
Is buying a put safer than shorting?
The loss is capped at the premium, which shorting cannot offer. In exchange you have an expiry working against you, so it is a different risk rather than a smaller one.
What happens if I own a put at expiry and it is in the money?
Your broker normally exercises it, which sells 100 shares per contract at the strike. If you do not own the shares you end up short stock, so check your broker's policy before the date.
Why is the put more expensive than the call at the same distance?
Usually skew. Downside protection is in steadier demand than upside speculation, so the market prices it higher.
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This is education, not advice, and nothing here predicts an outcome. Options carry risk of total loss on the premium paid and larger losses when sold. SES Technology Ventures LLC.