A put is an options contract that gives its buyer the right, not the obligation, to sell an underlying asset at a set price, known as the strike, on or before a specific expiry date. The buyer pays a premium for this right.
The seller of a put takes the other side. They receive the premium up front but accept the obligation to buy the asset at the strike if the buyer exercises. Puts are used to insure a position against falls or to speculate on prices going down. If you are new to the product, read our broader guide to what an option is.
What happens when you buy a put
Buying a put sets a minimum sale price for the underlying. If the market slides below the strike by enough to cover the premium you paid, the position can make money. If the market stays above the strike, the put usually expires worthless and your loss is limited to the premium.
Key mechanics:
- Strike and expiry: The strike is the pre-agreed sale price. The expiry is the last date the right is valid. American-style contracts can be exercised at any time up to expiry. European-style can only be exercised at expiry. The style depends on the market and contract.
- Intrinsic value: This is the amount a put is in the money. It is max(0, strike minus current price). If the share trades at £92 and your strike is £100, the intrinsic value is £8.
- Break-even: For a long put at expiry, break-even equals strike minus premium. If you paid £3 for a £100 strike put, you break even at £97.
Simple example: you buy one put on a share with a £100 strike for a £3 premium, covering 100 shares per contract. If the share settles at £80 at expiry, the put is worth £20 per share. Profit is £20 minus £3, or £17 per share, which is £1,700 for the contract before fees. If the share finishes at £102, the put expires worthless. Your loss is the £3 premium per share, £300 for the contract.
Selling a put: income with an obligation
When you sell a put, you collect the premium but may have to buy the underlying if assigned. If the market stays at or above the strike through expiry, the put expires worthless and the premium is your profit. If the market falls, losses grow as the price drops, all the way towards zero.
- Maximum profit: The premium received.
- Downside risk: Substantial. If the underlying goes to zero, the loss is roughly the strike times the contract size minus the premium received.
- Cash-secured approach: Many investors sell puts only when they hold enough cash to buy the shares if assigned. It is a way to try to enter a position at an effective discount, since the premium lowers the net purchase price.
- Assignment and exercise: Assignment can happen before or at expiry on American-style contracts. Exact timing, notifications and how settlement works vary by market and provider.
How a put’s price is built
The premium you see in an options chain reflects two parts: intrinsic value and time value. Time value is the extra paid for the chance that price moves make the option more valuable before expiry. Several forces drive that time value:
- Time to expiry: More time usually means a higher premium. All else equal, time value shrinks each day. This is time decay, often called theta.
- Implied volatility: Higher expected price swings lift options prices because bigger moves increase the chance of finishing in the money. Long puts benefit from rising implied volatility. Short puts are hurt by it.
- Interest rates and dividends: These influence relative pricing of calls and puts. Higher rates tend to support put prices versus calls on non-dividend assets. Expected dividends can make early exercise decisions on equity options more nuanced.
Greeks offer quick sensitivities. A long put has negative delta, which means it gains value when the underlying falls. It has positive vega, so it benefits from higher implied volatility, and negative theta, so it tends to lose value as time passes, other things equal.
Moneyness: in, at or out of the money
Traders describe a put’s relationship to the current price as moneyness:
- In the money (ITM): Strike above the current price. These have intrinsic value.
- At the money (ATM): Strike roughly equal to the current price. Mostly time value.
- Out of the money (OTM): Strike below the current price. Pure time value until the market drops below the strike.
Moneyness shapes behaviour. ITM puts move more like the underlying, with deltas closer to minus one. OTM puts are cheaper but need a bigger move to pay off.
Common ways investors use puts
- Protective put: Holding a share and buying a put on it creates a floor on potential losses below the strike. You pay the premium for that insurance-like protection.
- Bearish speculation: Buying a put to express a view that the asset will fall. This sets a defined maximum loss equal to the premium, with upside if the drop is large.
- Cash-secured put to enter a position: Selling a put at a price you would be happy to buy the shares at. If assigned, you purchase the shares at the strike and keep the premium, which lowers your effective entry price. If not assigned, you keep the premium as income.
- Spreads: A common strategy is the bear put spread, where you buy one put and sell another with a lower strike. This reduces the upfront cost but caps the maximum gain.
- Collars: Pairing a protective put with a covered call on an existing holding can limit downside and give up some upside to reduce net cost.
Where you see puts on a platform and what to check
On an options chain you will find expiries listed by date, with strikes down the middle and calls on one side, puts on the other. Quotes usually show bid and offer prices, along with volume and open interest. Wider bid-offer spreads can add trading cost, especially in less liquid strikes or expiries.
Look for the contract size. Equity options are often one contract to 100 shares, though this can vary with corporate actions and by market. Index and futures options have their own multipliers. Check whether contracts are American or European style, whether they settle physically into the underlying or in cash, and how assignment is handled by your broker. Exact processes, margin rules and order types can differ by provider.
If you are managing risk across a portfolio, track your total exposure. A long put can offset losses on a long share position, but it also costs premium and decays over time. A short put adds downside exposure similar to a covered share purchase, which affects your overall position and risk limits.
Put vs call in one minute
A put benefits from falling prices. A call benefits from rising prices. Holding a share plus a put roughly behaves like a call on the share with the same strike and expiry. This link is known as put-call parity. It underpins much of options pricing and helps explain why changes in rates and dividends shift relative values between calls and puts.
Whichever side you take, remember that option pricing and outcomes depend on the move in price, the time left and what the market expected for volatility when you traded. Two traders can hold the same strike and expiry but get very different results if one trades when implied volatility is high and the other when it is low.