A Put Option is a type of derivative contract that grants the buyer the right, but not the obligation, to sell a specified amount of an underlying asset at a set price (strike price) within a specified timeframe.
Effects of Buying a Put Option
- Market Outlook: You anticipate a decline in the asset’s price.
- Profit Potential: You have the right to sell the asset at the strike price, regardless of the market price.
- Maximum Loss: The maximum loss is limited to the premium you paid for the option.
- Profit Scenario: Profits increase as the asset’s price drops below the strike price.
Example:
If you buy a put option for Infosys shares with:
- Strike price: ₹1,300
- Premium paid: ₹50
- Expiry in one month
If the market price drops to ₹1,100 during that month:
- You can sell at ₹1,300 (the strike price), despite the market price being ₹1,100.
- Net profit = ₹1,300 – ₹1,100 – ₹50 = ₹150 per share.
However, if the share price remains above ₹1,300, your maximum loss is the premium you paid, ₹50 per share.
Effects of Selling a Put Option
- Market Outlook: You anticipate that the asset’s price will remain above the strike price.
- Premium Collection: You collect a premium when you sell the put option.
- Obligation: If the option is exercised, you may be obligated to buy the asset at the strike price, even if the market price is lower.
- Profit Scenario: Your profit is limited to the premium received.
- Loss Scenario: Your losses increase as the asset’s price falls below the strike price.
Example:
If you sell the same put option (strike price ₹1,300, premium ₹50), and Infosys shares fall to ₹1,100:
- You must buy the shares at ₹1,300, even though the market value is ₹1,100.
- Your loss would be ₹1,300 – ₹1,100 – ₹50 = ₹150 per share.
What if...
| Scenario | Outcome |
|---|
| Asset price falls below strike price for a put buyer | You can sell the asset at the strike price, making a profit |
| Asset price rises above strike price for a put seller | You keep the premium as profit |
| Option is exercised by the buyer | The seller is obligated to buy the asset at the strike price, possibly incurring a loss |
Tip: Buying a put option gives you a limited-risk, profit potential if the asset falls in price, while selling puts exposes you to higher risk but offers a fixed profit in the form of the premium.
Last updated: 27 Jun 2025
Related Articles
What is the moneyness of an option?
Moneyness is a key concept in options trading that indicates whether exercising an option would lead to a profit if done immediately. It describes the relationship between the option’s strike price and the current market price of the underlying ...
Is the buyer of an option subjected to Physical Settlement?
Yes, according to SEBI guidelines, all In The Money (ITM) stock options contracts are physically settled, regardless of whether you are the buyer or the seller. This means if you hold an ITM options position at expiry, you must either provide or ...
Can an option buyer exercise their right any time during the contract's duration?
No, in the Indian derivatives market, option contracts follow the European style of exercise, meaning they can only be exercised on the expiry date, not before. This rule applies to both index and stock options traded on NSE. What Does This Mean for ...
What is a call option?
A Call Option is a derivative contract that gives the buyer the right (but not the obligation) to purchase an underlying asset at a predetermined price (strike price) by a certain expiration date. Effects of Buying a Call Option Right to Buy: When ...
What are bull and bear spreads in options?
Bull and bear spreads are directional option strategies that involve buying and selling options at different strike prices but with the same expiry. These spreads help traders limit risk and define reward based on their market view. What Is a Bull ...