Put Option definition
A put option (or "put") is a contract giving the option buyer the right, but not the obligation, to sell—or sell short—a specified amount of an underlying security at a predetermined price within a specified time frame.
This predetermined price at which the buyer of the put option can sell the underlying security is called the strike price.
A put option becomes more valuable as the price of the underlying stock or security decreases. Conversely, a put option loses its value as the price of the underlying stock increases.
As a result, they are typically used for hedging purposes or to speculate on downside price action.

The payoff of a put option at expiration
Investors often use put options in a risk management strategy known as a protective put, which is used as a form of investment insurance or hedge to ensure that losses in the underlying asset do not exceed a certain amount.
In this strategy, the investor buys a put option to hedge downside risk in a stock held in the portfolio. If and when the option is exercised, the investor would sell the stock at the put's strike price. If the investor does not hold the underlying stock and exercises a put option, this would create a short position in the stock.
Time value, or extrinsic value, is reflected in the premium of the option. If the strike price of a put option is $20, and the underlying is stock is currently trading at $19, there is $1 of intrinsic value in the option. But the put option may trade for $1.35. The extra $0.35 is time value, since the underlying stock price could change before the option expires.

Different put options on the same underlying asset may be combined to form put spreads.
There are several factors to keep in mind when it comes to selling put options. It's important to understand an option contract's value and profitability when considering a trade, or else you risk the stock falling past the point of profitability.
For a put option buyer, the maximum loss on the option position is limited to the premium paid for the put.
The maximum gain on the option position would occur if the underlying stock price fell to zero.

Call option

In our app you can determine profit and loss in a minute.
Download it using QR code below.
Download LAVA and find better trades.
Download App