Put Option
A contract giving the right, but not the obligation, to sell an asset at a set price before expiration.
Also called: put · puts · long put
Written by Javier Sánchez Ros
In plain language
A put buyer profits when the underlying falls below the strike price by more than the premium paid. Maximum loss is the premium.
Puts are widely used as insurance. Holding a stock and buying a put creates a floor under the position, at the cost of the premium.
They are also the defined-risk alternative to short selling, avoiding both unlimited loss and borrow costs — but with time working against you.
Worked through
A protective put against the gap that defeats a stop
- Holding
- 100 shares at $95.40
- Put strike
- $90.00
- Stock gaps to
- $78.00
- Still able to sell at
- $90.00
A stop at $90 would have filled at $78, because a stop is an instruction to trade at the next available price and the next available price was twelve dollars lower. The put is not an instruction — it is a right to sell at $90, and a right does not care what the market opened at.
That is the one thing options do that no order type can. The floor holds through gaps, halts and illiquidity, because it is a contractual entitlement rather than a request to the order book.
It is not free, and the premium is the honest comparison. A stop costs nothing to place and fails exactly when it is needed; a put costs real money every time and works precisely then. Whether that is worth paying depends on the size of the position and the likelihood of a gap — which is why puts are bought around earnings and rarely in quiet stretches.
The protection also expires. A put bought for three weeks protects for three weeks, and the position is uncovered afterwards unless another one is bought, which makes it a recurring cost rather than a one-off.
Seen on a chart
Why it matters
A protective put caps downside at a known price without the gap risk of a stop order, because the right to sell at the strike does not depend on liquidity.
Common mistakes
- Buying puts only after volatility has already spiked, when premium is most expensive.
- Treating puts as cheap insurance without accounting for how quickly that cost accumulates.
Keep exploring
These concepts are connected. Understanding one usually makes the next one easier.
A contract giving the right, but not the obligation, to buy an asset at a set price before expiration.
The price at which an option contract can be exercised.
The price paid for an options contract.
The market’s expectation of future price movement, derived from option prices.
How much an option’s price moves for a $1 move in the underlying.