About the Put Option

A put option (put) gives the holder the right to sell a fixed number or amount of the underlying asset at a fixed price on or before a specified date.

A trader or investor who purchases a put is said to be "bearish" on the underlying asset, and benefits when there is a decrease in the price of the underlying asset. Again, there are other factors that impact the price of a put, particularly time and the volatility of the underlying asset. Like the call, the ability to analyze and select the correct underlying asset is the most important factor in purchasing a put.

A put does provide an unlimited profit potential (although an asset price can only decline to $0.00), and a limited risk of only the premium and commission paid to purchase the put.

The put holder (the one who purchased the put) benefits if the underlying asset price declines, by enabling the holder to buy the underlying asset in the open market at a lower price and sell it back at the higher price. A put can also provide profits when the underlying asset price declines because the put increases in value and could possibly be sold for a higher price than was paid by the holder to purchase it.

Puts are sometimes used as an alternative to the short sale of stock or for hedging purposes when the investor or trader owns the underlying asset and expects a price decline. Just as in calls, volatility and time decay affect the value of puts. For more information, see About Volatility.

In summary, a put holder is bearish on the underlying asset and benefits from a decrease in price of the underlying asset. The put provides an unlimited profit and a limited, known risk-the amount paid for the put.