Put Option
A put option gives the holder the right to sell an underlying asset at a specified strike price before the expiration date.
Exam Tip
Put buyer is bearish. Max loss = premium. Breakeven = strike - premium.
What is a Put Option?
A put option gives the buyer the right (but not obligation) to sell an underlying asset at a predetermined price (strike price) within a specific time period.
Put Option Basics
| Party | Position | Outlook | Rights/Obligations |
|---|---|---|---|
| Buyer (Long) | Pays premium | Bearish | Right to sell at strike |
| Seller (Short) | Receives premium | Bullish/Neutral | Obligation to buy if assigned |
When to Buy a Put
- You believe the stock price will FALL
- You want to protect existing shares (hedging)
- You want limited risk on a bearish bet
Breakeven Point
Breakeven = Strike Price - Premium Paid
Example: Buy a $50 put for $2 premium
- Breakeven = $50 - $2 = $48
- Stock must fall below $48 for profit
Put Option Outcomes at Expiration
| Stock Price | Option Status | Action |
|---|---|---|
| Above strike | Out of the money | Expires worthless |
| At strike | At the money | Typically expires worthless |
| Below strike | In the money | Exercise or sell |
Study This Term In
Related Terms
Option
SecuritiesAn option is a contract giving the holder the right, but not the obligation, to buy (call) or sell (put) an asset at a specified price before a certain date.
Call Option
SecuritiesA call option gives the holder the right to buy an underlying asset at a specified strike price before the expiration date.
Premium (Insurance)
InsuranceAn insurance premium is the amount paid by the policyholder to the insurance company for coverage, typically paid monthly, quarterly, or annually.