What Is A Put Option?

The buyer (or holder) of a Put Option has the right, but not the obligation, to sell their stock at the agreed strike price before the option's expiration. The seller (or writer) is obligated to buy the stock if the buyer (or holder) chooses to exercise the option.

A Put's price goes up as the underlying stock’s price goes down, and goes down as the underlying stock’s price goes up.

Buying Puts

When buying a Put Option, you believe the price of the underlying stock or index will drop. Your option gives you the right to sell the stock to the writer of the put at a predetermined price. For instance, if you buy 1 Put contract (1 option contract controls 100 shares of stock) on stock XYZ for .50 at the strike price of $100.00, the contract will cost you $50.00, because you are paying .50 for every share of stock that you control, and with 1 contract you control 100 shares. Now, you have the right to sell the underlying stock to the seller (or writer) of the option for $100.00 per share anytime before the option expires. If XYZ falls all the way down to $50.00, the writer of the option is still obligated to buy the stock from you at $100.00. If the stock skyrockets to $120.00, you would not want to sell the stock to the writer for $100.00, your option would be worthless and you would loose you $50.00 investment.

Selling Puts

When selling (or writing) a Put Option, you believe that the price of the underlying stock or index will increase. You are giving the buyer (or holder) the right to sell you the underlying stock or index at the strike price of the option. For instance, if you write 1 put contract for .50 at the strike price of $100.00. You will receive $50.00 (.50 per share, for 100 share of stock), for giving the buyer (or holder) the right to sell you the stock at $100.00 per share anytime before the expiration date. If the stock stays above the $100.00 strike price you make $50.00, but if the stock price falls below the $100.00 strike price, you are obligated to buy the stock from the holder for $100.00 per share, when and if the holder exercises the option.

Option Terms

Put
An Option contract that gives the holder the right to sell the underlying stock at a certain price anytime before a predetermined date.

Exercise
To exercise the right of the holder of an option to buy the underlying security from the writer.

Expiration date
The day on which an option contract becomes void. The expiration date for listed stock options is the Saturday after the third Friday of the expiration month.

Holder
The buyer of an option.

Strike Price
The stated price per share for which the underlying security may be bought by the option holder upon exercise of the option contract.

Write
To sell an option. The investor who sells is called the writer.

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