Put Option
The right to sell at a set price: portfolio insurance and defined-risk shorting.
A put option is the right to sell at a set strike before expiry. It hedges longs and shorts direction with loss capped at the premium.
A put option gives the holder the right, never the obligation, to sell an asset at the strike price before expiry. Buyers use puts to hedge long portfolios or to short with capped loss; sellers collect premium betting price stays above the strike.
How It Works
- Gains value as price falls below strike
- Maximum buyer loss is the premium paid
- Time decay accelerates near expiry
Trading Tips
Hedge with puts before events, not during crashes
Far out-of-the-money puts are cheap lottery, not insurance
Track implied volatility: rich premium kills put buying
Put Option Example
Say you hold $50,000 of shares and buy puts covering them for $400 expiring next month. A 10% market drop costs the portfolio $5,000 but the puts gain roughly $4,000. Insurance worked, for 0.8% of the protected amount.
How Traders Use Put Option
Buy puts as portfolio insurance on a schedule, not as panic purchases mid-crash when premiums peak. Roll before expiry decay accelerates. Size the hedge to the loss you actually fear.
Related Terms
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