What a put option grants you
Explain what a put option is and what right it gives the buyer.
Lesson path
Options, Risk Math, and Psychology
Options Anatomy
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Explain what a put option is and what right it gives the buyer.
A put is a right to SELL at a fixed price
A put option is the bearish twin of a call. The buyer of a put gets the right — not the obligation — to SELL a stock at the strike price before expiry. They pay a premium upfront for that right. The seller of the put collects the premium and takes the matching obligation: if assigned, they have to BUY the stock at the strike, even if the stock is now trading way below it.
Plain-English example. TSLA trades at $250. You think it's going to dump to $220 after earnings. You buy one TSLA $240 put expiring three weeks out for $4.00 per share. That's $400 total (one contract = 100 shares). At expiry, if TSLA is at $215, your right to sell at $240 is worth $25 per share. You make $2,500 minus the $400 premium, so $2,100 net profit. If TSLA stays above $240, the put expires worthless and you lose the full $400.
Why traders buy puts instead of shorting the stock outright. Shorting requires margin and has theoretically unlimited risk — if the stock goes up instead of down, you keep bleeding. A long put has defined risk (the premium). If you're wrong, you lose what you paid and nothing more. Puts are a cleaner way to express a bearish view with smaller capital and known max loss.
Recap: a put = the right to sell at a strike by an expiry, for a premium. Max loss = premium paid. Profit = grows as the stock falls below the strike. Useful for bearish bets and as portfolio insurance.
Knowledge check
Answer before moving on.
1. You buy a $240 put on TSLA for $4.00 premium. At expiry TSLA is at $215. Roughly what's your net P&L?
2. What's a 'protective put'?
3. Why might a trader buy a put instead of shorting the stock?
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