Put Option

Investments

A put option gives the buyer the right (but not obligation) to sell an underlying asset at a specified price (strike price) before expiry. For equity investors, buying put options acts as portfolio insurance -- if markets fall, put options profit, hedging losses in the equity portfolio.

In detail

Put option basics:nBuyer of put: pays premium, benefits if price falls below strikenSeller of put: receives premium, obligated to buy at strike price if exercisednnPortfolio hedge using Nifty put options:nOwn Rs 10L Nifty 50 portfolio. Buy Rs 1,000 put at Rs 50 premium per unit (1 lot = 50 units = Rs 2,500 premium)nIf Nifty falls 10%: put gains approximately Rs 10L x 10% = Rs 1L in valuenPremium cost: Rs 2,500. Net: Rs 97,500 loss instead of Rs 1L lossnnFor retail investors: buying put options for downside protection is legitimate but complex. Most retail investors are better served by proper asset allocation (debt + equity) than options hedging.

Formula

Put option value at expiry = Max(Strike - Spot, 0)nNet P&L for buyer = Option value at expiry - Premium paid

Real-life example

🇮🇳 India example

Ankit owns Rs 5L in Nifty ETF. Concerned about 15% election-related volatility. Buys Nifty 22,000 put option (Nifty at 22,400) at Rs 200 premium per unit. Cost: Rs 200 x 50 = Rs 10,000. If Nifty falls to 20,000 on results day: put worth Rs 2,000/unit = Rs 1L. Net hedge: pays Rs 10,000 in premium, protects Rs 90,000 downside.

Frequently asked questions

Is buying put options the same as short selling? ▼

Different. Short selling: you sell shares you don't own, expecting price fall (unlimited loss potential). Buying put options: you pay a fixed premium for the right to sell at a price. Maximum loss = premium paid. Put options have defined, limited risk.