An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time. This is the opposite of a call option, which gives the holder the right to buy shares.
Put Options are used when we expect the price of the underlying stock to go down.
Put Options are options to sell a stock at a specific price on or before a certain date. Put Options are like insurance policies.
If we buy a new car and then buy auto insurance on the car, we pay a premium to protect the car if it’s damaged in an accident. The put option gains in value as the value of the underlying instrument value decreases.
If all goes well and the insurance is not needed, the insurance company keeps the premium in return for taking on the risk.
With a Put Option, we can “insure” a stock by fixing a selling price. If something happens which causes the stock price to fall, and thus, “damages” our investment, we can exercise our option and sell it at its “insured” price level.
If the price of our stock goes up and there is no “damage”, then we not need to use the insurance. Our cost is the option premium.