Learn the stock market › Options › Lesson 4 of 9
What is a put option?
Change the example
An example with round prices that you can change. The chart starts with a bought put where the stock has fallen to $80.
With the stock at $80 at expiry the result is +$15 per share, +$1,500 for a contract of 100 shares. Break-even is $95. The most you can lose: $5.
The mirror image of a call
A call earns from a rise and a put earns from a fall. Above the strike the line is flat, and the buyer has lost the premium. Below the strike the result grows the further the stock falls.
The gain still has a limit. A stock cannot fall below zero, so with a $100 strike and a $5 premium the buyer can earn at most $95 per share.
The same deal from two sides
One contract of 100 shares, a $100 strike and a $5 premium.
| Price at expiry | Option's value | Buyer | Writer |
|---|---|---|---|
| $70 | $30 | +$2,500 | −$2,500 |
| $90 | $10 | +$500 | −$500 |
| $95 | $5 | $0 | $0 |
| $100 | $0 | −$500 | +$500 |
| $110 | $0 | −$500 | +$500 |
| $130 | $0 | −$500 | +$500 |
The writer has the same limit the other way: in the example at most $95 per share, $9,500 for the contract, if the stock becomes worthless. That is far more than the $500 the writer received.
Why anyone buys a put
There are two common reasons. Someone who owns the stock can use the option as protection against a fall, which is described among the strategies. Someone who does not own it gets a result that follows a fall, with the premium as the largest loss.
Test yourself
Strike $100, premium $5. The stock is at $120 at expiry. What is the buyer's result per share?