Put option

A put option is a contract that gives its buyer the right, but not the obligation, to sell an underlying stock at a fixed strike price on or before the expiration date. The seller of the put collects a premium and takes on the obligation to buy the shares at the strike if the buyer exercises.

How it works

A standard US equity put covers 100 shares and is quoted per share, so a put priced at $1.20 costs $120 per contract. Puts gain value as the stock falls.

• Buyer: maximum loss is the premium. Breakeven at expiration is strike minus premium.
• Seller: keeps the premium if the stock stays above the strike, but may have to buy shares at the strike if it drops. A seller who sets aside the cash to do that is writing a cash-secured put.

Investors use puts two ways: as insurance on shares they own (a protective put) and as a bearish bet with defined risk.

Why it matters for traders

Buying puts is the main alternative to short selling. There is no stock to borrow, no borrow fee and no unlimited loss, but the put has a deadline and loses time value every day. Put prices often swell before binary events like a PDUFA date or earnings, so the stock may need to fall sharply just to cover the premium.

Put volume relative to call volume feeds the put/call ratio, a widely watched sentiment gauge.

Example

Northwind Therapeutics (NWTX) trades at $40 ahead of an FDA decision. A trader buys one $35 put for $1.20 ($120). Breakeven is $33.80.

• The FDA issues a complete response letter and NWTX closes at $22 at expiration. The put is worth $13.00 ($1,300). Profit: $1,180.
• The drug is approved and NWTX rises to $48. The put expires worthless. Loss: $120.

FAQ

Is buying a put the same as shorting a stock?

Both profit from a decline, but a put caps your loss at the premium and requires no share borrow. A short position has no expiration but carries unlimited risk.

Why do puts on some stocks cost so much?

High implied volatility, often driven by a pending catalyst or heavy short interest, raises put premiums. Hard-to-borrow stocks also tend to have expensive puts because shorting the shares directly is costly.