Put Option

An option giving the buyer the right to sell 100 shares at the strike price before expiration — used to hedge a stock position or to profit from falling prices.

A put option gives its buyer the right to sell 100 shares at the strike price regardless of where the market price has fallen. If you hold a stock at $80 and buy a $75 put, you can sell your shares at $75 even if the stock drops to $50 — limiting your downside to $5 per share plus the premium paid. This is how institutions hedge large equity portfolios against market declines.

Put buyers profit when the stock falls below the strike by enough to recover the premium. Put sellers collect the premium and take on the obligation to buy the shares at the strike if the put is exercised. A cash-secured put — where the seller holds enough cash to actually purchase the shares — is a widely used strategy for acquiring stock at a target price while earning premium income while waiting.

Raw put buying is expensive because options prices rise when fear rises — a put bought during high volatility costs significantly more than the same put bought during calm markets. This is why "protective put" hedging is often more costly than it looks: you pay the most for protection right when you feel you need it most, which is exactly when implied volatility is highest.

This definition is for informational and educational purposes only. Nothing on Finance Compass constitutes financial, investment, or trading advice. Always conduct your own research and consult a qualified professional before making financial decisions.