A put option gives you the right to sell a stock at a fixed price before expiry. You want the stock to go DOWN.
Puts gain value when the stock falls, volatility rises, or downside fear increases.
Think of it like buying insurance on a car you already own. You pay a small premium. If the car is totaled (stock crashes), the insurance pays out big. If the car is fine (stock goes up), you just lose the premium — which is the peace of mind you paid for. The insurance company (the put seller) keeps your premium as long as nothing bad happens.
SPY is at $500. You buy a 500 put for $8 premium. Breakeven at expiry = $492. Above $500, the put expires worthless and you lose $8 × 100 = $800. Below $492, every $1 lower is +$100 profit. At $470, the put is worth $30 — profit = $22 × 100 = $2,200.
A put is a contract that says: "I have the right to sell 100 shares of XYZ at ₹1,000 each, any time before 30 days." That ₹1,000 is the strike. You are locking in a minimum price you can sell at, no matter how far the stock falls. You pay premium upfront for that right.
If the stock crashes to ₹800, your put still lets you sell at ₹1,000 — a ₹200 premium per share over the market price × 100 = ₹20,000 of intrinsic value. If the stock rises to ₹1,100, nobody wants to sell at ₹1,000 when the market offers ₹1,100, so the contract is worthless. Lower stock = more valuable put.
Investors who own shares often buy puts on those shares. If the stock crashes, the puts pay off and offset the loss on the shares. If the stock rallies, the puts expire worthless — but the shares are up, so it is a small cost for real downside protection.
Someone wrote that put and pocketed your premium. They are now obligated to buy your shares at ₹1,000 if you exercise. Their best case is the put expires worthless. Their worst case is the stock crashes and they are forced to buy expensive shares at a price far above the market.
You paid premium upfront. Here is how each outcome plays out. Strike = 1,000, premium = ₹25.
The stock fell below your strike. Your put has intrinsic value equal to (strike − spot). Subtract premium paid to get net profit. Exercise to sell shares at the strike, or just sell the put contract itself for cash.
Stock expires at ₹900. Intrinsic = 100 − 25 premium = ₹75 profit per share. × 100 shares = ₹7,500 net profit.
The stock finished right at the strike. Intrinsic value is zero. Selling at ₹1,000 when market is also ₹1,000 is no advantage — nothing to exercise. The entire premium you paid is lost.
Stock expires at ₹1,000. Intrinsic = 0. You lose the full ₹25 × 100 = ₹2,500.
The stock rallied, which is the opposite of what you wanted. Nobody wants to sell at ₹1,000 when the market pays more. The contract dies worthless. You lose 100% of the premium — but nothing more. The cap on buyer’s risk is absolute.
Stock expires at ₹1,050. Put worthless. Loss = full ₹25 × 100 = ₹2,500. Capped.
You collected premium upfront. You are now obligated to BUY 100 shares at the strike if the buyer exercises.
The buyer would not exercise — why sell at ₹1,000 when the market is higher? The contract expires worthless and your obligation vanishes. The premium you collected upfront is yours to keep. This is the put seller’s goal (often used as a "cash-secured put" income strategy).
Stock expires at ₹1,050. You keep the full ₹25 × 100 = ₹2,500 premium.
Intrinsic value at the strike is effectively zero. The buyer has nothing meaningful to exercise. You keep almost the entire premium you collected.
Stock expires at ₹1,000. You keep close to the full ₹2,500 premium.
The buyer exercises. You must buy 100 shares at ₹1,000 even though the market price is lower — so you immediately eat the gap. If the stock crashes hard, your loss can be very large (up to strike × 100, if the stock went to zero). Put sellers have large but finite downside risk.
Stock expires at ₹850. You are forced to buy at ₹1,000 — ₹150 intrinsic loss per share − ₹25 premium = ₹125 net loss × 100 = ₹12,500 loss.
If a put is exercised, the buyer delivers 100 real shares to the seller at the strike price, and the seller pays cash for them. Example: a 1,000-strike put exercised means the seller must hand over ₹1,00,000 and receives 100 shares now worth ₹90,000 in the open market — that is where the loss comes from. This is why many investors sell puts on stocks they actually want to own anyway: if the stock falls and they get assigned, they wanted to buy it at that price regardless, and they keep the premium too. But if you sell a put on a stock you do NOT want to own, you can end up holding a bag of shares you never wanted — at a price well above the current market.
See how well you understand the term before moving on.
1 A put option profits when the stock:
2 You buy a put with strike ₹1,000 for ₹25 premium. What is your breakeven at expiry?
3 What is the maximum gain for a put buyer?
4 A put seller profits most when: