What is a Put Option?

Introduction

Put options are the opposite of call options. A call option gains when prices rise. A put option gains when prices fall. Puts are useful both for trading falling markets and for protecting the shares you already own.

The Insurance Example

Think of car insurance. You pay a small premium every year. If your car is damaged, the insurance company pays you. If nothing happens, you lose the premium, but you had peace of mind. A put option works like insurance for your shares.

What is a Put Option?

A put option is a contract that gives the buyer the right, but not the obligation, to sell the underlying at a fixed strike price on or before expiry. You buy a put when you expect the price to fall.

Nifty Put Option Example (Illustrative)

Nifty is at 24,000. You expect a fall. You buy a 24,000 strike put at Rs 140. Lot size 65.

• Cost = 140 x 65 = Rs 9,100.
• Breakeven at expiry = Strike - Premium = 24,000 - 140 = 23,860.
• If Nifty closes at 23,600, the put is worth 400. Profit = (400 - 140) x 65 = Rs 16,900.
• If Nifty closes at 23,900, the put is worth 100. Loss = (140 - 100) x 65 = Rs 2,600.
• If Nifty closes above 24,000, the put is worthless. Loss = Rs 9,100.

Using Puts to Protect Shares (Protective Put)

Suppose you hold 500 shares of a stock bought at Rs 800. It is now Rs 1,000 and results are coming next week. You are worried about a fall but do not want to sell.

• You buy one lot (assume 500 shares) of the 980 strike put at Rs 20. Cost = Rs 10,000.
• If the stock falls to Rs 850 after results, your shares lose Rs 75,000 in value, but the put is worth at least Rs 130 x 500 = Rs 65,000, covering most of the loss.
• If the stock rises, you lose only the Rs 10,000 premium, and your shares gain.

Put vs Short Selling

Call vs Put in One Line

• Call: right to buy. Expect a rise.
• Put: right to sell. Expect a fall.

Find Put Options on GoPocket

On the GoPocket app, open the F&O segment for Nifty or any F&O stock, choose an expiry and look at the put options. Compare the premiums of puts with strikes above and below the current price.

Key Takeaways

• A put option gives the right to sell at the strike price.
• Buy puts to profit from a fall or to protect your shares.
• Breakeven = strike price - premium.

Disclaimer: Illustrative figures. Stock lot size is assumed; verify current NSE lot sizes. Derivatives involve high risk.