Dictionary

Put option

A contract giving the buyer the right, but not the obligation, to sell 100 shares at a set strike price before expiration.

Buying a put: payoff at expiry. A 95-strike put bought for 3 is worthless above 95, so the 3 is lost; it breaks even at 92 and gains a dollar for every dollar lower. The most it can lose is the premium, which is why it is also used as insurance on shares.

A put gains value when the underlying falls. Buyers use puts as a bearish bet or as insurance on stock they own (protective-put). Sellers collect premium and agree to buy shares at the strike-price if assigned (cash-secured-put).

Puts on indexes are the main way portfolios are hedged, which is why put demand drives implied-volatility higher in selloffs.

Example: a stock is $50. You buy a $45 put for $1.00 ($100). If the stock falls to $38 by expiration the put is worth $7, a $600 profit. If it stays above $45 you lose $100.

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