What Is a Put Option?

Options are additional strategies that allow you to make money from stock positions you own or to hedge your portfolio against losses. Options can be extremely risky, and you should understand them fully before buying or selling any. A put option is a guarantee from one investor to buy a stock from another investor at a certain price.

Buying

When you buy a put, you are buying a guarantee from another investor that he will buy a particular stock from you at a predetermined price during a specific time frame--no matter what the market price of the stock is.

Selling

When you sell a put, you are guaranteeing that you will buy a stock from another investor at a guaranteed price within a certain time frame.

Exercising a Put

As the buyer of a put, you are able to exercise the put option until the expiration date. That means you can make the put seller act on her obligation to buy your shares at the agreed-upon price.

Risk of Buying a Put

When you buy a put, you are concerned that the price of your stock will go down, so you pay someone to guarantee you a certain price for it. Should the value of your stock go up instead of down during the life of the option, you will not need to exercise it and will be out the money you spent to buy the put.

Risk of Selling a Put

When you sell a put, you are hoping that the value of the stock goes up so that you keep the money you sold the put for, but the buyer of the put will sell the stock in the open market instead of you having to buy it at a higher price than it is worth. If the stock goes down in value, you will be obligated to buy the stock for more than it is worth.