What is Put Option?
A put option gives the holder the right to sell 100 shares of the underlying stock at the strike price before the expiration date. You profit when the stock price falls below the strike price.
Put Option Explained
Buying puts is a bearish strategy, essentially a way to short with limited risk. Puts are also used as insurance (hedging) for existing stock positions. The breakeven for a put buyer is the strike price minus the premium paid. Put options increase in value as the underlying stock decreases and as volatility rises.
Real-World Example
You own 100 shares of AAPL at $180 and are worried about an upcoming earnings report. You buy a $175 put for $3.00 ($300) as insurance. If AAPL drops to $160, your put is worth at least $15, offsetting most of your stock loss. If AAPL rises, you only lose the $300 'insurance premium.'
Related Terms
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