Put Options Explained
A put option gives you the right to sell a stock at a specific price (strike price) before the expiration date. Puts are essential for both protection and income strategies.
What Buying a Put Means
When you buy a put option, you pay a premium to gain the right to sell 100 shares of a stock at the strike price. This is like buying insurance—you profit if the stock falls.
Example: Buying a Put for Protection
Stock: Tesla (TSLA) trading at $200
You own: 100 shares
You buy: 1 put option with $190 strike, expiring in 30 days
Premium paid: $5.00 per share = $500 total
If TSLA crashes to $170: Your put is worth at least $20 ($190 - $170), giving you a $1,500 profit ($2,000 - $500 premium), offsetting your $3,000 stock loss.
If TSLA stays above $190: Your put expires worthless, but you only lost the $500 premium (insurance cost).
Best for: Protecting stock positions or making bearish directional bets with limited risk.
What Selling a Put Means
When you sell a put option, you receive a premium and take on the obligation to buy 100 shares at the strike price if the buyer exercises. This is the foundation of income strategies like cash-secured puts.
Example: Selling a Cash-Secured Put
Stock: Microsoft (MSFT) trading at $350
You sell: 1 put option with $340 strike, expiring in 30 days
Premium received: $3.50 per share = $350 total
Cash reserved: $34,000 (to buy 100 shares if assigned)
If MSFT stays above $340: The put expires worthless, you keep the $350 premium (1% return in 30 days).
If MSFT falls below $340: You may be assigned to buy 100 shares at $340, but you got them at a discount (current price minus the $3.50 premium you collected).
Best for: Generating income while waiting to buy stocks at a discount. See Cash-Secured Puts strategy.
Assignment Mechanics
When you sell a put and it expires in-the-money (stock price below strike), the buyer can exercise their right to sell shares to you. This is called assignment.
What Happens When Assigned
Your broker automatically buys 100 shares at the strike price. You now own the stock and can sell covered calls on it—this is step 2 of The Wheel Strategy.
Can You Avoid Assignment?
You can roll the put to a later expiration or buy it back to close the position. Learn more about assignment and exercise.
Why Puts Are Used for "Buying Stocks at a Discount"
When you sell a cash-secured put, you're essentially saying: "I'm willing to buy this stock at $X, and I'll collect premium while I wait."
Example: Effective Purchase Price
You sell a put with $100 strike and collect $3 premium.
If assigned, you buy at $100, but your effective cost is $97 ($100 - $3 premium).
This is why value investors love cash-secured puts—you get paid to wait for your entry price.