A put option is a financial derivative instrument that gives the buyer the right but not the obligation to sell the underlying product at a specified price (called the strike price) by a specified date (called the expiration date).

The buyer of the put option pays a certain amount called “premium” to the seller of the put option called “writer”. The put option buyer makes a profit if the price is below the strike price at the time of expiration, in which case the option is said to be exercised.

On the other hand, the put option buyer doesn’t make any profit if the price at expiration is above or equal to the strike price, in which case the option is said to expire worthless.

So, the maximum amount a put option buyer can lose is the premium paid to the writer of the option, while the possible profit can be several times greater than the premium paid.

Put Options Explained

Put options can be used both for hedging and for speculation. If you want to protect your investments from a downside move, you can buy put options and make money if the price of your investments falls basically shielding you from the volatility and a market panic.

If you buy a put option for speculation, then you expect the underlying to lose value due to some development and thus profit from such event. Generally, put options are more commonly used for stocks but you can trade them on other products like currencies, commodities and so on.