Put Option
A put option gives its buyer the right, but not the obligation, to sell 100 shares of an underlying asset at a fixed strike price before the option expires.
Investors buy puts when they expect the underlying price to fall, or to protect stock they already own. A put gains value as the stock drops below the strike price. If the stock stays above the strike at expiration, the put expires worthless and the buyer loses the premium.
Example: a stock trades at $100. You buy one put with a $95 strike for a $3 premium, or $300. If the stock falls to $80, the put is worth $15 per share ($95 minus $80), or $1,500, a profit of $1,200. The breakeven is the strike minus the premium: $92.
A protective put works like insurance. An investor holding shares buys puts to limit the downside: if the stock crashes, gains on the put offset part of the loss on the shares. The cost is the premium, similar to an insurance payment.
The seller of a put collects the premium but must buy the shares at the strike if assigned, even if the stock has fallen far below it. Buying puts is a way to bet on a decline with a defined maximum loss, unlike short selling.