Glossary · Funds and derivatives
Put option
A put option is the right to sell a stock or other asset at a set price (the strike) until a set date. It gains value when the price falls.
Also called: put, puts, protective put, buying puts
When a 1-year put struck 10% below the price would have ended in the money. Worst: −43%, to Mar 2009.
In plain words
A put option is the right to sell something at a fixed price, the strike, until the option expires. If the market price falls below the strike, the put is valuable: you can sell for more than the thing is now worth. If the price stays above the strike, you let the put expire and lose only the premium you paid.
Puts work like insurance. If you own a share at $100 and buy a put with a $90 strike, you know you can always sell for at least $90 until expiry, however far the price falls. The premium is your insurance cost.
Traders also buy puts without owning the share, simply to bet on a fall. Like any option buyer, they can lose at most the premium.
Example
Insuring 100 shares
You own 100 shares bought at $100: $10,000. You buy a put on them with a $90 strike, expiring in six months, for $3 a share: $300.
- The share falls to $60. Without the put you would have lost $4,000. With it you sell at $90: you lose $1,000 on the shares plus the $300 premium = $1,300.
- The share stays at $100. The put expires worthless: you lose the $300 premium, 3%.
- The share rises to $120. You gain $2,000 on the shares, minus $300 for the put: $1,700.
Whatever happens, the most you can lose until expiry is $1,300: the gap to the strike plus the premium.
One level deeper
A put is “in the money” when the price is below the strike. Breakeven for a put buyer is the strike minus the premium, and the largest possible gain is the strike minus the premium, reached if the price goes to zero.
The seller of a put collects the premium but must buy the shares at the strike if asked. Some investors sell puts at a price they would happily pay; the risk is a crash, when they must buy far above the market price.
Insurance against crashes is expensive. Puts well below the current price on the S&P 500 usually cost more than their chance of paying off would suggest, because many investors want protection; that is part of why the VIX tends to be higher than the swings that actually follow.
How often a 1-year put 10% below the price would have paid off
Each point is the change in the S&P 500’s price over the previous 12 months. Below the dashed line, a one-year put with a strike 10% below the starting price ended in the money: in 12% of the 922 periods since 1950. Insurance rarely pays out, but when it does, it pays most in the worst years.
The numbers behind the chart
| Date | S&P 500, change over 12 months |
|---|---|
| Jan 1950 | 9.9% |
| Dec 1950 | 19.4% |
| Dec 1960 | −3.8% |
| Dec 1970 | −1.2% |
| Dec 1980 | 23.8% |
| Dec 1990 | −5.7% |
| Dec 2000 | −6.8% |
| Dec 2010 | 11.8% |
| Dec 2020 | 16.3% |
| Dec 2022 | −16.3% |
| Dec 2023 | 19.8% |
| Dec 2024 | 28.3% |
| Dec 2025 | 14.0% |
| Oct 2026 | 14.7% |
Why it matters
Puts are how investors and funds insure portfolios against a crash.
Their prices show how worried the market is: when fear rises, puts get expensive.
Traders use them to bet on falls with limited risk, unlike short selling, where losses have no cap.
A common mistake
Myth: Buying puts is a cheap way to make money in a crash.
In fact: Puts pay off well in a crash, but crashes are rare and protection costs money every year. Someone who keeps buying puts that expire worthless can lose more over the years than the crash would have cost.
Questions people ask
When does a put option make money?
At expiry, when the price is below the strike minus the premium. A $100-strike put bought for $5 is profitable below $95.
What is a protective put?
Buying a put on shares you own, so you can always sell them at the strike until the put expires. It caps your loss in exchange for the premium.
What is the difference between buying a put and short selling?
Both gain when the price falls. A put buyer can lose at most the premium; a short seller borrowed shares and can lose without limit if the price rises.
Read more on BigCapital
About the numbers
- The numbers on this page are recalculated from the data every night; the sources are listed at the end of the page.
- S&P Composite price and total return since 1871, and US consumer prices: Robert J. Shiller, Online Data (shillerdata.com); total return with dividends reinvested monthly, calculated by BigCapital.
- This page explains a term. It is not investment advice.