Put Option

Stock trading dictionary: meaning, example and how traders use it.

Last updated: October 17, 2026

Definition: A put option is a contract that gives its buyer the right, but not the obligation, to sell 100 shares of an underlying stock at a set strike price on or before an expiration date. Puts gain value as the stock falls.

How a put option works

A put is one of the two basic types of option; the other is the call option. The buyer pays a premium to the seller (writer) for the right to sell the underlying stock at the strike price. Standard US equity options cover 100 shares per contract.

If the stock trades below the strike at expiration, the put is in the money and has intrinsic value equal to the strike minus the stock price. If the stock is above the strike, the put expires worthless and the buyer loses only the premium. The seller keeps the premium but takes on the obligation to buy shares at the strike if assigned.

Put option example

Suppose a stock trades at $50 and you buy one put with a $48 strike expiring in two months for a premium of $2.00, or $200 per contract. Your breakeven price at expiration is $46 ($48 strike minus $2 premium).

  • If the stock falls to $40, the put is worth $8, or $800. Your profit is $600.
  • If the stock ends at $47, the put is worth $1, and you lose $100.
  • If the stock ends at $48 or higher, the put expires worthless and you lose $200.

Before expiration, the put's price also reflects time remaining and implied volatility, so it can be sold for more or less than its intrinsic value.

How investors use put options

Hedging: A protective put works like insurance for a stock already in your portfolio. If the shares drop sharply, gains on the put offset part of the loss.

Speculation: Buying puts is a way to profit from a decline with defined risk, unlike short selling, where losses can be unlimited.

Income: Selling cash-secured puts collects premium in exchange for possibly buying the stock at the strike. Combining a sold put with a bought put at a lower strike creates a bull put credit spread.

Put option vs call option

A call gives the right to buy shares at the strike price and gains value when the stock rises; a put gives the right to sell and gains value when the stock falls. Both have a strike price, an expiration date, and a premium, and both lose time value as expiration approaches. Buying either type limits risk to the premium paid, while selling either type exposes the writer to potentially large obligations. Many strategies combine the two, for example a collar that pairs a protective put with a covered call.

Risks of put options

Put buyers can lose the entire premium, and time decay erodes value every day the stock does not move. Put sellers face substantial losses if the stock collapses, since they may be required to buy shares at the strike when the market price is far lower. Like other derivatives, options carry leverage that magnifies both gains and losses.

Frequently asked questions

When should you buy a put option?

Investors typically buy puts when they expect a stock to decline or want to protect an existing holding against a drop. Whether it makes sense depends on the premium, time to expiration, and risk tolerance.

What happens if a put option expires in the money?

In the US, equity options that are in the money by a small threshold are generally exercised automatically at expiration, meaning the holder sells 100 shares per contract at the strike price unless they instruct their broker otherwise.

What is the most you can lose buying a put?

The maximum loss for a put buyer is the premium paid plus commissions. Put sellers can lose much more, up to the strike price minus the premium received per share.

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For information only, not investment advice. See the disclaimer.