Put Options
Buying a put: the right to sell at the strike, like "insurance against a fall". The lower the stock goes, the more it's worth.
Risk warning: forex, CFDs, options, futures and crypto assets usually involve leverage or high volatility, and you can lose more than you put in. This lesson only teaches the concepts; all numbers are for illustration and are not investment advice.
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Text version · Options Basics, lesson 4: “Put Options”
Buying a put: the right to sell at the strike, like "insurance against a fall". The lower the stock goes, the more it's worth.
Put ≈ insurance against a drop
Pay an insurance fee (the premium) to lock in the right to sell at the strike price before expiration. The further the stock falls, the more the insurance pays out.
The mirror image of a Call
A Put's kink is also at the strike, but in the opposite direction: the lower the stock, the more it makes. Breakeven = strike − premium.
Stock + Put = insurance for your shares
If you own the stock and buy a Put, the Put makes up for losses once the stock falls below the strike, so your losses rest on a “floor”. This is called a protective put, and the cost is the premium.
Key takeaways
- A put has intrinsic value only when the stock is below the strike.
- Breakeven = strike − premium.
- A long put's maximum loss is the premium; its maximum gain = strike − premium (if the stock drops to 0).
- Buying a put while holding the stock is like insuring your shares against a fall.
Try it yourself
You can do these exercises in this lesson's interactive simulation:
- Drag the stock price at expiration from $130 down to $40: the Put only starts to be worth something once the stock falls below the $100 strike.
- Set the premium to $4 and leave the stock at $90: how much do you make per share? And per contract?
- Keep $4 and drag the stock to $97: it's already in the money, so why are you still down $1?
- Drag the stock all the way left to $20 and look at “Max profit / loss”: why is the maximum profit $96 and not unlimited?
Quiz and explanations
- 1. When does a long put make money?
- Answer: When the stock falls below (strike − premium).The further it falls, the more you make.
- 2. A $100-strike put costs a $4 premium. At expiration the stock is $90. What's your P&L per share?
- Answer: +$6.Intrinsic value is $10; minus the $4 cost, that's a net gain of $6.
- 3. You hold 100 shares (bought at $100) and buy 1 put with a $95 strike for a $2 premium. At expiration the stock has dropped to $80. What's the combined P&L per share on the stock + put?
- Answer: −$7.The stock loses $20; the put's intrinsic value $15 − cost $2 = +$13; combined −$7. However far it falls, the most you can lose is (100 − 95) + 2 = $7.
Terms in this lesson
- breakeven (Breakeven): The underlying price at expiration where you neither make nor lose money.
- call option (Call): The right to buy the underlying at the strike price; the higher the stock goes, the more it's worth.
- intrinsic value (Intrinsic Value): What you'd get by exercising right now; for a call, max(stock price − strike, 0).
- premium (Premium): The price of an option, paid by the buyer to the seller; it's the most the buyer can lose.
- protective put (Protective Put): Buying a put while holding the stock, like buying insurance against a price drop.
- put option (Put): The right to sell the underlying at the strike price; the lower the stock goes, the more it's worth.
- strike price (Strike): The price written into an option contract at which you can buy or sell.
- option writer (Writer): The side that sells an option and collects the premium, taking on the obligation if the buyer exercises.