Put Option

2 min read

A put option is a specific type of option contract that gives the owner the right to sell an asset at a specified price. Put options are primarily used to leverage or hedge a trader’s position, but they can be used for other strategies as well. For a given asset, a put option is defined by its strike price and expiration date.

If the spot price of the asset is below the strike price of the contract, then the option is in the money, meaning the option would be profitable to execute. The holder of the contract can sell the underlying asset above market value and is guaranteed to make a profit on that trade.

For example, a trader who owns a put option on 1 bitcoin with a strike price of $15,000 could sell 1 bitcoin for $15,000 even if the market price was $10,000. The trader could then buy that same bitcoin from the market for $10,000, realizing a riskless profit of $5,000 on that trade.

This does not necessarily mean that buying the put option was profitable as that depends on whether the profit from the trade was more than the initial price of the option.

A put option can also be resold to the market before it expires. If the underlying asset decreases in value then the market price of the call option will increase in value. For this reason, a trader does not necessarily need to be financially prepared to execute an options contract in order to trade it. If the option has low liquidity then reselling the option may not be a viable strategy.