Put Option Strategy

A Put Option gives the buyer the right, but not the obligation, to sell an underlying asset at a specified strike price before or at expiration. It’s a bearish strategy used when a trader expects the asset’s price to decline. Put options offer leveraged downside protection with limited risk for buyers and income potential for sellers.

Structure

• Long Put: Buy 1 put option (bearish outlook)
• Short Put: Sell 1 put option (bullish or neutral outlook)

Profit & Loss Profile

• Long Put: Max profit = strike price − premium paid (if asset falls to zero)
• Short Put: Max profit = premium received; Max loss = strike price − asset price (if assigned)
• Breakeven: Strike price − premium paid (for long put)

Ideal Market Conditions

• Use long puts when expecting a sharp decline in asset price
• Use short puts in stable or rising markets (preferably cash-secured)
• Best when implied volatility is high for sellers, low for buyers

Example

A stock is trading at $100. You buy:

• 1 put option with a $95 strike for $3

Breakeven = $92. If the stock drops to $85, your profit = $7 ($95 − $85 − $3).

Risks & Considerations

• Time decay erodes value of long puts
• Short puts carry assignment risk and require margin or cash collateral
• Volatility shifts can impact pricing and profitability