Put Option

•6 min read•by Angel One

A put option lets you sell an asset at a set price within a timeframe, useful for hedging or speculating on price drops. Investors can buy or sell puts via stock exchanges.

A put option gives investors the right, not obligation, to sell an asset at a fixed price within a set period.

Put options are ideal for traders anticipating a price decline, offering flexibility and effective downside risk protection in volatile markets.

Investors can profit from falling prices by buying puts, while sellers earn premiums if asset prices remain stable or rise.

In India, put options can be traded on exchanges like NSE and BSE for selected stocks and market indices.

A Put Option Primer

There are two types of options available for trading – call and put options, each with unique purposes. Put options are derivatives that give you the right, but not the obligation, to sell an asset at a predetermined date at a specific price. These are used for different kinds of assets, including stocks, commodities, minerals, energy products like petroleum, and so on.

Derivatives were introduced in the Indian stock markets in 2000. As of 2025, the Securities & Exchange Board of India (SEBI) offers futures and options on nearly 200 specified securities. However, this can change as SEBI reviews the eligibility of these securities periodically.

What Is A Put Option?

A put option is a financial contract that gives the holder the right, but not the obligation, to sell an underlying asset (such as a stock) at a specified price, called the strike price, within a predetermined time frame. It is commonly used in options trading and is a tool for hedging or speculating on the decline in the price of an asset.

If the asset's price drops below the strike price, the holder can sell it at the higher strike price, making the put option profitable. Conversely, if the price stays above the strike price, the holder may let the option expire, only losing the premium paid for purchasing it. Put options are essential in risk management, allowing investors to protect against downside market movements.

How Do The Put Options Work?

Put options work by gaining value when the price of the underlying stock or asset decreases. If the stock price falls below the strike price, the put option becomes more profitable.

On the other hand, if the stock price rises, the value of the put option decreases. This makes put options useful for protecting against losses or speculating on a price drop.

A common risk management approach involving put options is the protective put, which acts like insurance for investments. This strategy limits potential losses on an asset to a specific amount.

Investors holding a stock can buy a put option to protect against a price decline. If the stock price drops, they can sell it at the strike price. If they don’t own the stock, exercising the put creates a short position.

Buying A Put Option

Investors purchase put options as a form of protection for their other investments. They typically buy puts that match the amount of the asset they own. If the asset's value falls, they can sell it at the predetermined strike price. Buyers gain by effectively maintaining a position similar to short selling.

The profit for a put option holder comes when the asset's price falls below the strike price before the option expires. During this period, the put buyer can sell the asset at the agreed strike price.

For example, imagine ABC Company’s stock is priced at ₹50. Put options with a strike price of ₹50 cost ₹3 each, with one put representing 100 shares, so one put costs ₹300 and expires in six months. John buys one put option for ₹300, hoping that ABC's stock price will decrease. If the stock price drops to ₹40, John can use his put option to sell the stock at ₹50, making ₹1,000 (100 shares x ₹10). After deducting the ₹300 cost of the put, John's net profit is ₹700. However, if the stock price stays above ₹50, John loses his ₹300 investment.

Selling A Put Option

Investors can also profit by selling put options. Put sellers aim to earn from the premiums paid by the buyers, betting that the options will depreciate.

After selling a put, the seller must buy the asset at the strike price if the buyer exercises the option. The put seller profits if the asset's price stays the same or rises above the strike price.

If the asset’s price drops below the strike price before the option expires, the put buyer profits by exercising their right to sell. In contrast, the seller faces the obligation to buy at the higher strike price. If the price remains the same or higher, the put seller keeps the premium, but the buyer doesn’t profit.

Features Of Put Options

Put options are derivative contracts that give traders the right, but not the obligation, to sell an underlying asset at a fixed price.

This right is purchased at a premium, which the buyer pays to the seller.

They are ideal for traders expecting a decline in the price of the underlying asset.

Put options offer flexibility, allowing investors to sell the contract before expiry or exercise it if prices fall below the strike price.

These options are widely used for hedging against downside risks, especially in volatile market conditions.

Benefits Of Put Options

Put options provide an effective risk management tool, protecting traders and investors from losses during falling stock prices.

They allow investors to set a selling price for their holdings, minimising potential losses.

Traders can profit in bearish markets without owning the underlying asset, capitalising on price declines.

Put options require lower capital investment compared to short selling, making them accessible for smaller investors.

They can be used to diversify trading strategies and maintain portfolio balance efficiently.

Overall, put options enhance trading flexibility and improve risk management for both short-term and long-term investors.

Difference Between A Put Option And A Call Option

Basis of Comparison	Put Option	Call Option
Market View	Bearish – used when expecting a price decline.	Bullish – used when expecting a price increase.
Right Granted	Right to sell the underlying asset.	Right to buy the underlying asset.
Profit Scenario	Profitable when the asset price falls below the strike price.	Profitable when the asset price rises above the strike price.
Use Case	Hedging or protection against losses.	Speculating on upward price movements.
Risk Level	Limited to the premium paid.	Limited to the premium paid.
Ideal For	Risk-averse or bearish investors.	Growth-seeking or bullish investors.

Which is better for trading – a put or a call option? The answer to that question is not all that clear-cut. It all depends on your risk tolerance, the situation in the market, and your investment goals. However, here’s a general look into which option to choose when:

Put Options: Used when an investor believes the underlying asset's price will fall.

Call Options: Used when an investor believes the underlying asset's price will rise.

How To Trade Put Options In India?

Now that you understand what a put option is, you can go ahead and trade them. Derivatives such as put and call options are available on stock exchanges such as the Bombay Stock Exchange and the National Stock Exchange. You can buy and sell futures and options through your broker, just like any other share. You can buy put and call options in indices like the Sensex, the Nifty and other sectoral indices. However, you must note that you cannot trade in derivatives on all stocks. They are only available for about 175 shares listed on the exchange.

FAQs

What happens when you execute a put option?

If you are the buyer, you sell the stocks to the writer or seller at the strike price. The seller is obligated to receive the asset if the buyer decides to exercise his right. If the contract expires unprofitable, nothing happens, and the seller gets to retain the premium.

When should you exit a put option?

When you are holding a put option, you actually have the choice to quit it early. Put options, unlike futures, doesn’t require you to follow the contract. The right time to exit a put option will depend on your position, that is whether you are a buyer or seller. One standard method to exit an option is to offset. You can sell put option that you have previously bought or repurchase put option that you have previously sold before the expiry date. Unless you offset an option, you haven’t officially exited the trade.

What happens if we don’t sell options on expiry?

If an option is not closed or exercised by the holder before expiration, it will expire based on its value: In-The-Money (ITM) options are typically auto-exercised, obligating the seller to fulfill the contract. Out-of-The-Money (OTM) options expire worthless, meaning the buyer loses their premium, and the seller retains the premium as profit.

Is it better to exercise an option or sell it?

You exercise an option when you want to buy or sell the underlying asset. But in most cases, options aren’t used even when they are profitable.

How much can you lose on a put option?

If you buy a put option, your loss will depend on the stock price movement – if the stock price falls substantially below the strike price, as a put buyer, you make a profit. But if stock prices move in the opposite direction, you lose. So, as a buyer, your loss from the put option also gets magnified by the movement in stock price. For a put seller, the maximum gain is limited to the premium paid. But on the downside, the loss amount is theoretically infinite.

Can you exercise a put option before expiration?

Exercising a put option before expiration is possible but rarely happens because the value of the option is directly related to extrinsic market factors – underlying asset, the dividend paid, and more. If you want to exit a put option before the expiration date, you need to opt for ‘sell to close’ to secure some profit. Only sell a put option if you are interested in owning the underlying Enter the deal only if the net price of the underlying is attractive You can keep the entire premium if the option expires OTM You can own an underlying below the market price Selling put allows you to buy attractive stocks at a price that is below the market price.

Is selling puts a good strategy?

Selling a put option is a good strategy, but it’s prudent only in the following situations.

How do you profit on a put option?

Several profit-loss situations can arise during a put option trading. As a put option buyer, you profit from exercising the option when the stock price falls below the strike price. The profit from a put option is the difference between the strike price and the premium paid. Higher the resultant value, higher is your profit.

What to do after you buy a put option?

Here are a few things you can do. If the underlying tanks you exercise rights and bag profit If the underlying price rises and you let the option expire, you lose the premium paid You can also offset and exit the trade.

Is a put option a short?

Short put option meaning, writing a put option or agreeing to buy an underlying at a pre-decided price on the expiry date. A trader opens a short put when he believes the stock price to remain higher than the strike price. A short put is when the put is uncovered, also called naked put. The substantial loss arising from the short put, if the buyer chooses to exercise his rights, can be substantial. On the other hand, the profit margin is limited to the premium received.

Is a put option bullish or bearish?

The put option is bearish in that it gives the holder an opportunity to make a profit in the event of a fall in the price of the underlying asset. Put options are purchased by investors when they foresee a decrease in the value of the stock or the index.

It gives the authority, though not the duty, to sell the obligatory asset at a fixed price (strike price) before expiry. Basically, the lower the market price is in comparison to the strike price, the larger the value of the put option; hence, the commodity provides a proper hedging or downside protection tool.

What is a put option in the share market?

A put option of the share market is an agreement between buyer and seller where the former is allowed to sell a large amount of stock at a particular price, but is not compelled to do so within a set time frame. It is usually popular among investors who are expecting a falling stock price or those who would desire to hedge against any future losses. The seller of the put option, on the other hand, must purchase the stock in case the option buyer exercises the contract before or at the expiry date