What does a put pay for, and when does it pay?
A put is the call's mirror: it gives you the right to sell the underlying at the strike. It gains value when the stock falls, which makes it the market's standard-issue instrument for both bearish opinions and insurance on things you already own.
The payoff, in arithmetic
Put value at expiry = the greater of (strike − spot) or 0
Profit = (strike − spot, floored at 0) − premium
Breakeven = strike − premium
Notice the floor works the same way as a call's: a put can never be worth less than zero, because the right to sell at $95 is simply unused when the stock is at $120.
A worked contract
Stock at $100. You buy one three-month put, strike $95, premium $2.00 ($200 of cash).
Breakeven = $95 − $2 = $93.
| Stock at expiry | Intrinsic | Profit per share | Per contract |
|---|---|---|---|
| $110 | $0 | −$2 | −$200 |
| $100 | $0 | −$2 | −$200 |
| $95 | $0 | −$2 | −$200 |
| $93 | $2 | $0 | $0 |
| $90 | $5 | +$3 | +$300 |
| $80 | $15 | +$13 | +$1,300 |
| $0 | $95 | +$93 | +$9,300 |
The diagram, and the ceiling nobody mentions
Reading left to right: the line starts high on the far left (a collapsed stock), slopes downward at 45 degrees as the stock price rises, crosses zero at $93, and goes flat at −$2 once the stock reaches $95 and stays there forever.
That top-left corner is the put buyer's ceiling. A share cannot fall below zero, so the most a put can ever be worth at expiry is the strike itself — here $95, or $93 after the premium. Put buyers have a large but genuinely finite maximum gain, unlike call buyers.
Two different jobs, one contract
The same put does two quite different things depending on what else you hold:
- On its own, it expresses a view that the stock will fall meaningfully by a date. Its risk is the premium, no more.
- Alongside 100 shares you own, it becomes a floor under a position you want to keep — the structure Unit 4 dissects as the protective put, deductible and all.
Compared with shorting the stock
Short selling the same stock also profits from a decline, but the shapes differ in a way worth memorising. A short seller's loss is theoretically unlimited (the stock can rise forever) and has no deadline. A put buyer's loss is capped at the premium — but the position has an expiry date and a recurring cost, and can be entirely correct about the company while being wrong about the calendar.
Neither is "safer." One trades unlimited risk for open-ended patience; the other trades a hard time limit for a hard loss limit. Naming which trade you are making is the point.
Try it now
- Open Apple's chain in the EODHD Terminal, choose an expiry roughly three months out and read the put side. Pick a strike roughly 5% below the current share price, below. Note the strike and the premium, as the midpoint of Bid and Ask.
Open AAPL.US — options in the EODHD Terminal
- Compute the breakeven (strike − premium) and the maximum possible gain (strike − premium, per share, if the stock went to zero). Multiply both by 100.
- Compare the premium with the same expiry's call at a symmetric distance above spot. On many equities the put costs more — hold that observation. The name for it is volatility skew, and it is why one implied-volatility number never describes a whole chain.