A Put option is a financial agreement between two parties, a buyer and a seller, for an option based on an underlying financial instrument. Put options behave as a direct opposite to call options by allowing buyers to profit from downwards moves in said underlying asset. Put options are commonly known as a "Put". Any buyer of a put option is granted the right, but never the obligation, to sell an agreed upon quantity of the aforementioned underlying financial instrument to the person who sold the put option as long as it is before the contract expires. The contract expires on the expiration date, which is an agreed upon date which is set when the put option contract is purchased. The strike price is the agreed upon price which remains the same no matter how the stock's actual price changes over a period of time.

 

Let us put this into Layman's terms: A put options allows a seller to sell a stock or another financial instrument at a fixed price, as long as the put option contract has not expired. For example, if someone purchases a put option on a stock with a strike price of $20, they have the exercise at any point while the contract is valid to sell that stock for the same place, even if the stock has depreciated in price sometime during that period of time. So you can sell your stock at $20 for each share, even if the price of the stock has depreciated to $10, or even $5 for every share.

 

Using a put option, you can essentially purchase a drop in price for a stock, profiting when the stock declines in price, without the margin requirements for shorting either the stock or its futures. Put options are one of the most convenient of all financial instruments for when it comes to profiting from stock price drops.

 

In the example mentioned above, if the stock drops from $20 to $2, your put options will be worth $18 when it expires, because the underlying stock has to be purchased by whoever wrote it for the full amount of $20, even when its current worth is only $2. You can either purchase the underlying stock for $2 dollars, then exercising the put option to sell it for the full price of $20, or you can simply sell the option to another buyer for your invested value, which is $18.

 

The seller, who is the writer of a put option, is absolutely obligated to buy the stock from the buyer, if the buyer decides to sell. If you think that a stock is going to move down, you can buy a put option. On the other hand, if you believe that a stock is going to move upwards, you will want to sell a put option. Put options are addressed in the format of expiration month, followed by strike, and type. Put options that expire in June at the strike price of $22 for example, will be referred to as June22 Put. A Oct 25 Put on the other hand is a put which will expire in October at the strike price of $25.