Put option
Also called: put, puts
A put option is a contract that gives its buyer the right to sell a stock at a set price (the strike) before or at a set date. Buyers profit when the stock falls below the strike by more than the premium paid.
Puts are used to bet on a fall or to insure shares you already own, the way a homeowner insures a house: you pay a premium, and if the price collapses the put pays out.
Unlike short selling, a bought put can't lose more than its premium.
Formula
Payoff at expiry = 100 × max(0, strike − price)
Example
A put with a $40 strike costs $2 ($200). The stock drops to $33. The put pays 100 × ($40 − $33) = $700, a $500 profit.
In Journey Shares
Puts on a person pay out if their share price ends below the strike at Friday's expiry. →
Related terms
- Call option: A call option is a contract that gives its buyer the right, but not the obligation, to buy a stock at a set price (the strike) before or at a set date.
- Short selling: Short selling is borrowing shares, selling them, and buying them back later, to profit if the price falls.
- Strike price: The strike price is the fixed price at which an option lets its holder buy (for a call) or sell (for a put) the underlying stock.
- Option premium: An option's premium is the price paid to buy it.
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