How Does a Put Option Work?

A put option is a financial contract that gives you the right, but not the obligation, to sell a stock at a specific price (the strike price) before a certain date (the expiration date). Think of it as insurance for your stocks.

Understanding Put Options

When you buy a put option, you're making a bet that the stock price will go down. Here's what you need to know:

You pay a premium: The cost of buying the put option
You get a strike price: The price at which you can sell the stock
You have an expiration date: The deadline to exercise your right

Examples of Put Options Contracts

Example: You buy a put option on Tesla stock with:

Strike price: $200
Expiration: 45 days from now
Premium: $6 per share (x100 shares = $600 total)

If Tesla's stock drops to $180 before expiration, you can sell it at $200 (making $20 per share, minus the $6 premium = $14 profit per share).

In the Money vs Out of the Money for Puts

For put options, the definitions are reversed:

In the Money (ITM): When the stock price is below the strike price. Your put has intrinsic value.
Out of the Money (OTM): When the stock price is above the strike price. Only time value remains.
At the Money (ATM): When the stock price equals the strike price.

How to Read an Options Chain for Puts

When looking at an options chain, put options are typically displayed on the right side. Here's what to look for:

Bid/Ask: The current market prices to sell/buy the option
Volume: Number of contracts traded today
Open Interest: Total number of outstanding contracts
Implied Volatility: Market's expectation of future volatility

Put Options vs Call Options

Key Differences:

Call Options: Profit when stock goes UP
Put Options: Profit when stock goes DOWN
Call Options: Give you the right to BUY
Put Options: Give you the right to SELL

Options Expiry Date Explained

Every option has an expiration date when it becomes worthless if not exercised:

Standard Expiration: Third Friday of each month
Weekly Options: Expire every Friday
LEAPS: Long-term options that can expire years in the future
Time Decay: Options lose value as expiration approaches, especially in the last 30 days

When to Use Put Options

Put options are useful in several scenarios:

Protection: Hedge against portfolio losses
Speculation: Profit from expected price drops
Income Generation: Sell puts to collect premium (advanced strategy)
Risk Management: Part of spread strategies like iron condors

Practice Options Trading for Free

Before risking real money, consider:

Using paper trading accounts offered by most brokers
Starting with small positions to learn the mechanics
Focusing on liquid stocks with tight bid-ask spreads
Tracking your trades in a journal to learn from mistakes

Learn More

Continue your options education with these resources:

Disclaimer: Options trading involves significant risk of loss and is not suitable for all investors. This information is for educational purposes only and should not be considered investment advice.