If you are learning about options, you need to understand put options. Along with calls, puts are one of the two basic building blocks of options trading. Let us explain what they are in simple terms.
What is a Put Option?
A put option gives you the right to sell a stock at a specific price before a specific date. You pay money upfront (the "premium") to buy this right.
Think of it like insurance: You pay for the right to sell your stock at a guaranteed price, even if the market price drops lower. If the stock crashes, your put protects you.
When Do Puts Make Money?
Put options increase in value when the stock price goes down. The lower the stock goes, the more valuable your put becomes.
Example
You buy a put option on stock ABC with a $100 strike price for $2.00 (that is $200 per contract since each contract covers 100 shares).
- If the stock drops to $90, your put is worth at least $10 ($1,000 per contract). You paid $200 and now it is worth $1,000. Nice profit!
- If the stock stays at $100 or goes higher, your put expires worthless. You lose the $200 you paid.
Why Do People Buy Puts?
1. To profit from a stock going down
If you think a stock is going to drop, buying a put lets you make money when it falls. This is easier and less risky than short selling.
2. To protect stocks they own
If you own shares and worry about a drop, you can buy puts as insurance. This is called a "protective put." If the stock crashes, the put gains value and offsets your losses.
3. To hedge a portfolio
Many traders buy puts on SPY or QQQ to protect their entire portfolio from market drops.
Key Terms You Need to Know
- Strike price: The price at which you can sell the stock
- Premium: The price you pay for the put option
- Expiration date: The date when the option expires and becomes worthless
- In the money (ITM): When the stock is below the strike price
- Out of the money (OTM): When the stock is above the strike price
Buying Puts vs Selling Puts
You can either buy puts or sell puts. They have opposite goals:
Buying puts: You want the stock to go down. You pay premium upfront and can make unlimited profit if the stock crashes.
Selling puts: You want the stock to stay flat or go up. You collect premium upfront but take on risk if the stock drops. This is how put credit spreads work.
Risks of Buying Puts
- Time decay: Puts lose value every day as expiration gets closer
- You can lose 100%: If the stock does not go down, you lose everything you paid
- You need to be right about timing: The stock might eventually drop, but if it happens after your put expires, you still lose
Track Your Put Options
Pro Trader Dashboard tracks all your options trades automatically. See your win rate on puts, calls, and spreads.
Summary
Put options let you profit when stocks go down or protect stocks you already own. They are a powerful tool, but they come with risks. Start small, track your trades, and learn from each one.
Ready to learn more? Check out our guide on call options or credit spreads.