What is a put option
A put option is a contract that gives its buyer the right, but not the obligation, to sell an asset at a fixed price (the strike price) on or before a set date (the expiry date).
The buyer pays a price for this right, called the premium. The seller, also called the writer, receives the premium and must buy the asset at the strike price if the buyer exercises.
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Worked example (hypothetical)
Take a share trading at price S. A trader buys a put with strike K and pays premium P per share.
- Price at expiry stays above K. Selling at K makes no sense, so the put expires unused. The buyer loses the premium P. That premium is the most the buyer can lose.
- Price at expiry falls below K. The buyer can sell at K while the market price is lower. The payoff is K − S per share, and the result after cost is K − S − P.
- Break-even is K − P. The put only shows a net gain when the price at expiry is below that level.
For the writer the results are reversed. The writer keeps P if the put expires unused, but loses K − S − P per share if the price falls below break-even. If the asset price collapses, that loss can be large. Multiply every result by the contract size to get the amount per contract.
Options are leveraged products. A small premium controls a larger position, and both buyers and writers can lose money fast.
Put vs call option
| Put option | Call option | |
|---|---|---|
| Buyer's right | Sell at the strike | Buy at the strike |
| Buyer gains when | Price falls below the strike | Price rises above the strike |
| Writer's obligation | Buy if exercised | Sell if exercised |
| Delta of a bought option | Negative | Positive |
Precise definition and edge cases
- Intrinsic value is K − S when the spot price is below the strike. Otherwise the put has no intrinsic value. The rest of the premium is time value.
- Moneyness. A put is in the money when spot is below strike, at the money when they are equal, and out of the money when spot is above strike.
- Exercise style. American-style puts can be exercised at any time up to expiry. European-style puts can be exercised only at expiry. Early exercise of a deep in-the-money American put can be rational, for example when interest earned on the sale proceeds outweighs the remaining time value.
- Settlement. Settlement is either delivery of the asset or a cash payment of the difference. See cash vs physical settlement.
- Put-call parity. For European options on the same asset, strike and expiry, call − put = spot − present value of the strike, adjusted for dividends.
- Common uses. A protective put is a put bought against an asset you already hold. A cash-secured put is a put written while holding enough cash to buy the asset if it is assigned.
Where you see the term
- Option chains list calls and puts side by side by strike, with premium, volume and open interest.
- News and reports quote the put/call ratio as a gauge of hedging demand, and mention "put buying" during sell-offs.
- Platforms. MetaTrader 5 has an options board for exchange-traded options, where a broker offers them.
In Pakistan, the regulator for securities and futures is the Securities and Exchange Commission of Pakistan (SECP), with trading in listed securities and commodities only via SECP-licensed securities and futures brokers. Also, per the SECP, offshore forex/CFD platforms operate without regulatory approval in Pakistan. See regulation and safety for more.
Related terms
Derivatives · Expiry date · Forward contract · Counterparty · Central counterparty · Exposure · Risk management · Trading glossary
Frequent questions
What is the put option meaning in simple words?
It is a paid right to sell something at an agreed price until a set date.
Does a put buyer have to sell?
No. The buyer chooses whether to exercise. Only the writer has an obligation.
What is the maximum loss on a bought put?
The premium paid, plus any fees.
Is the writer's risk limited?
The loss is capped only because the asset price cannot fall below nothing. Even so, the loss can be much larger than the premium received.
Put vs call option: which one rises in value when the price falls?
The put. A call gains when the price rises.