Where a call option is a bet on, or a right to benefit from, a rise, a put option works the other way. It gains value when the underlying falls. That makes it useful both for expressing a bearish view and for protecting holdings against a decline.
This article has the put option explained step by step: the buyer's right, a worked example, the seller's obligation, how puts are used as insurance, and the mistakes to avoid.
What a put option is
A put option gives the buyer the right, but not the obligation, to sell an underlying at a fixed strike price at expiry. In India, as with all exchange-traded options, this is European-style.
The buyer pays a premium for this right. The seller receives the premium and accepts the obligation to buy at the strike if the option is exercised.
The buyer benefits if the underlying falls below the strike by more than the premium. The seller benefits if it does not.
Index put options are settled in cash. Stock put options are settled by delivery: an in-the-money stock put held to expiry means the buyer delivers shares and the seller takes them, at the strike price.
As always, premiums are per unit and multiplied by the exchange-set lot size.
A worked example
Suppose an index is at 24,000 and a trader expects a fall over the next two weeks. The trader buys a 23,900 strike put option at an illustrative premium of 120.
Cost: 120 per unit, the maximum loss.
Breakeven at expiry: strike minus premium, 23,900 − 120 = 23,780. The index must finish below this to profit.
Outcomes at expiry:
Index at 24,200: the option expires worthless. Loss: 120.
Index at 23,900: worthless at the strike. Loss: 120.
Index at 23,780: worth 120. Breakeven.
Index at 23,600: worth 300. Profit: 180.
Index at 23,400: worth 500. Profit: 380.
The shape mirrors a bought call option: a fixed loss above the strike, and a profit that grows as the index falls below the breakeven. Unlike a call option, the profit cannot grow forever, because the underlying cannot fall below zero — though for practical purposes the potential gain from a large fall is substantial.
Again, being right about direction is not enough. A fall from 24,000 to 23,850 would lose money, because it does not reach the breakeven.
The seller's obligation
The seller of the same put option receives 120.
If the index finishes at or above 23,900, the seller keeps the full premium.
If it finishes at 23,780, the seller breaks even.
If it finishes at 23,400, the seller loses 500 − 120 = 380, and losses keep growing the further the index falls.
Market falls are often sharper and faster than rises, and can arrive as gaps at the open. That makes selling put options without protection particularly dangerous during periods of stress, when losses can arrive suddenly and margin requirements rise at the same time.
Many sellers therefore buy a further put option below the one they sell, creating a bull put spread with a defined maximum loss. Investors who sell put options on stocks they genuinely want to own, with the cash to take delivery, are using a different approach covered elsewhere on this site.
A put versus short selling. For a bearish view lasting more than a day, a put option has practical advantages for an individual. Short selling shares in the cash market must be closed the same day, and selling futures carries losses that grow without limit if the price rises. A bought put option can be held for its full life, needs only the premium, and cannot lose more than that premium. The trade-off is time decay and the need for the fall to exceed the breakeven before expiry.
Puts as protection
The most important use of put options for many investors is not speculation but insurance.
Protective put. Someone holding shares can buy a put option on them. If the shares fall below the strike, the put option gains, offsetting part of the loss. The premium is the cost of that insurance.
Index puts for broader holdings. Investors with diversified holdings that move with the market can buy index put options to protect against a broad fall, though the match is imperfect.
The cost of protection. Put options below the current price usually carry higher implied volatility than equivalent call options, reflecting demand for protection. Insurance tends to be most expensive exactly when people most want it — after a fall has started.
Like any insurance, protection costs money every time it is not needed. It makes most sense for specific risks over specific periods, rather than permanently.
A protective put in numbers. An investor holds shares bought at 1,000 that now trade at 1,000, and buys a 950 put option for an illustrative 20. If the shares fall to 800, the put option is worth 150 at expiry, so the combined position is worth 800 + 150 = 950, minus the 20 paid — an effective floor of 930. If the shares instead rise to 1,100, the put option expires worthless and the 20 is the cost of having been insured.
Mistakes to avoid
Buying cheap, far-away puts as lottery tickets. They usually expire worthless unless there is a crash.
Buying protection after the fall. Premiums rise sharply once fear sets in. Protection is cheaper to buy in calm periods.
Ignoring the breakeven. A modest fall may not cover the premium.
Selling puts without a plan for gaps. A sharp overnight fall can produce losses far beyond any stop.
Forgetting delivery on stock puts. An in-the-money stock put held into expiry involves delivering or taking shares.
An account with a full option chain
Compare put premiums, breakevens and implied volatility before deciding. Free to open
Prices in the example are illustrative, not market data. Lot sizes, settlement rules and margins are set by the exchanges and SEBI and change from time to time. This is educational material, not advice, and no position is recommended. We run no tips group and no signal service, we manage nobody's money, and no return is promised. Derivatives can lose more than the amount blocked against them.
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Frequently Asked Questions
What is a put option in simple words?
A contract giving the buyer the right, but not the obligation, to sell an underlying at a fixed strike price at expiry, in exchange for a premium paid to the seller.
How do I calculate the breakeven of a put option?
Subtract the premium paid from the strike price. A 23,900 strike bought for 120 breaks even at 23,780 at expiry.
When does a put option make money?
For the buyer, when the underlying falls below the breakeven by expiry, or when the premium rises before expiry because of a fall or higher volatility.
Can a put option protect my shares?
Yes. A protective put gains when the shares fall below the strike, offsetting part of the loss, at the cost of the premium.
Why is selling put options risky?
The seller's gain is limited to the premium, while losses grow as the underlying falls, and falls can be sudden and arrive as gaps.
Related Reading
- The call option, explained the same way
- A structure built from both
- Protecting shares with a put
- Selling puts on stocks you want
- Why puts carry higher volatility
- Capping a sold put with a spread
Disclaimer: TheFinBaba provides educational content only - this is not investment advice. Trading involves risk of loss.
