Dictionary / Trading and orders
What Is a Put Option?
A put option gives you the right, but not the duty, to sell a stock at a set price before a set date. People buy puts when they think a stock will fall, or to protect stocks they own.
A simple example
A stock costs $100. You pay $4 for a put with a $90 strike price. If the stock falls to $70, you can sell at $90: a $20 gain per share, minus the $4: $16 profit. If it stays above $90, the put expires worthless and you lose the $4.
Puts as insurance
If you own a stock and fear a drop, buying a put limits how much you can lose, like an insurance policy. You pay the premium for that protection. When fear rises, puts get more expensive, which pushes up the VIX.
Put vs short selling
Both profit when a price falls. With a put, the most you can lose is what you paid. With short selling, losses have no limit.