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What is a Put Option?
Academy->What is a Put Option
A put option is an agreement that allows someone to sell shares at a fixed price before the option expires. Put options are used in many different trading strategies. Some traders buy puts when they expect a stock price to fall, while others sell cash-secured puts to generate income and potentially buy shares at a lower price.
Every put option has:
- A stock.
- A strike price.
- An expiration date.
- A premium.
If the option is exercised, the shares are sold at the strike price written into the contract. The strike price never changes. Only the stock price changes.
Buying a Put Option
When you buy a put option, you're hoping the stock price falls. If it does, the option may become more valuable before it expires. The most you can lose is the premium you paid for the option.
Selling a Cash-Secured Put
When you sell a cash-secured put, you agree to buy shares at the strike price if you're assigned. In return for accepting that obligation, you receive the option premium. Many investors use cash-secured puts to generate income while waiting for an opportunity to buy shares at a price they're comfortable paying.
OptionLogic in Practice
OptionLogic helps traders compare cash-secured put opportunities using live option chain data. Instead of comparing premium alone, you can evaluate ROI, annualized ROI, market structure, assignment risk, and other information before choosing a strike price.
OptionLogic Dashboard displaying cash-secured put opportunities (Right Centre), with strike prices, premiums, ROI, and expiration dates.
Frequently Asked Questions
Do I have to own shares to buy a put option?
No.
You can buy a put option without owning the underlying shares.
Do I need cash to sell a cash-secured put?
Yes.
A cash-secured put requires enough cash in your account to purchase the shares if you're assigned.
Why do traders buy put options?
Some traders buy puts because they expect the stock price to fall before the option expires.
Why do investors sell cash-secured puts?
Many investors sell cash-secured puts to generate income while potentially purchasing shares at a lower price.
What happens if I'm assigned?
If you're assigned, you'll purchase the shares at the strike price. The premium you received when selling the put is yours to keep and helps reduce your overall cost basis.
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