Definition
A put is the mirror of a call: profitable when the stock falls. Buy a put to speculate on a decline OR to hedge existing stock holdings (like insurance). Cost is the premium; maximum profit is (strike − 0) if the stock goes to zero; maximum loss is the premium paid. Puts are foundational to portfolio protection: buying puts on your holdings caps downside at strike price minus premium. Selling puts (writing) collects premium but obligates you to buy the stock at strike if assigned — a strategy sometimes called 'getting paid to wait' for a lower entry price. Put-call parity relates put and call prices to spot price and interest rates, ensuring no arbitrage.
Example
You own 100 shares of XYZ at $50 and worry about a drop. Buy 1 put with strike $48 expiring in 90 days for $1.50 premium ($150 total). If XYZ falls to $35: put worth $13 = $1,300. Your stock lost $1,500, but put gained $1,150 — net loss only $350 instead of $1,500. Insurance worked.
Frequently Asked Questions
Why buy a put on a stock I own?
As insurance. If the stock crashes, the put's gain offsets much of the loss. Cost is the premium — think of it as an annual insurance policy on your position.
What does 'selling puts' involve?
You receive premium upfront and agree to buy the stock at strike if it drops below. If the stock stays above strike, you keep the premium as profit. If it drops, you're obligated to buy — sometimes at a loss but at your chosen strike price.
Are puts always more expensive than calls?
Not always. In markets with fear (high VIX), puts often carry higher implied volatility premiums due to demand for downside protection. In calm markets, put/call pricing tends to be more symmetric.