Put Option
A contract giving its buyer the right, but not the obligation, to sell a stock at a fixed price on or before a set expiry date.
What it is
A put option is a contract between two parties covering a set quantity of an underlying stock — conventionally 100 shares per contract. The buyer pays a premium for the right to sell those shares at a fixed price, called the strike price, on or before the expiry date. The buyer is never forced to use that right; it is exercised only if it suits, and otherwise the contract simply expires. The seller, or writer, of the put has the mirror-image obligation: if the buyer exercises, the writer must buy the shares at the strike price no matter what the stock is actually trading at. A put generally gains value as the underlying stock falls, and it expires worthless if the stock finishes at or above the strike on the expiry date.
Why it matters
Puts are how the market prices downside. The premium on a put is a live, observable number reflecting what participants collectively charge to take on the risk of a stock falling — which makes put pricing a window into perceived risk, not just a trading instrument. The risk is also deeply asymmetric depending on which side of the contract is taken. A put buyer's loss is capped at the premium paid, but that premium can go to zero entirely, and frequently does. A put writer collects a limited premium while accepting an obligation that runs all the way down to the stock reaching zero. Options are complex, leveraged instruments where total loss of the amount committed is a normal outcome, and where a writer's exposure can far exceed the cash received.
How it's calculated
A put's premium is set by supply and demand in the options market, quoted per share and multiplied by the contract size — conventionally 100 shares — to give the cash cost of one contract. It splits in two. Intrinsic value is what exercising right now would be worth: strike price minus underlying price, floored at zero. Time value is whatever the premium exceeds intrinsic value, and it shrinks as expiry nears, decaying faster in the final stretch rather than evenly. Models like Black-Scholes estimate a theoretical premium from strike, price, time, rates, dividends and volatility. Implied volatility runs the model backwards — it is derived from the observed market price, not fed in.