What is a put option? A plain explanation for sellers

What a put option is

A put option is a contract between a buyer and a seller. The buyer pays a price, called the premium, for the right to sell 100 shares of a stock at a fixed price (the strike) on or before a set date (the expiry). The seller collects the premium and takes on the obligation to buy those shares at the strike if the buyer uses the right.

If the stock stays above the strike, the right is worthless, the contract expires, and the seller keeps the whole premium. If the stock falls below the strike, the buyer can sell to the seller at the strike, which is now above the market price.

Buying a put versus selling a put

Buying a put is a bet that a stock falls, or insurance against holding it. Your loss is capped at the premium. Because most puts expire worthless, buyers lose the premium often.

Selling a put is the other side. You are paid up front, win often, and lose less often but by more. That is why selling puts is called selling insurance. Whether it pays depends on whether the premiums collected exceed the claims, and that has to be counted over many trades, not one.

The three numbers that define a put

Strike: the price at which the put can be exercised. A lower strike is further from the current price, pays a smaller premium, and is assigned less often.

Expiry: the date the contract ends. Shorter expiries lose their value faster but leave less time to be right about direction. Thirty to forty-five days is a common middle ground.

Premium: what the buyer pays and the seller keeps. It rises with the stock's expected movement (implied volatility) and with time to expiry.

What a seller has to be ready for

Assignment. If the put finishes in the money you buy 100 shares per contract at the strike, so you need the cash. That is what makes it a cash-secured put. American-style options can also be assigned early.

A put seller's worst case is the strike times 100, minus the premium, if the stock went to zero. Size by that worst case, not by the usual outcome.

Try it before using money

You can describe a put-selling rule in plain words, replay it on years of real option quotes, and paper trade it on this site without a broker connection. See the cash-secured puts guide for what that history says, and the how to sell puts guide for the step-by-step.