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When you buy a put option, you\u2019re buying the right to sell shares at the strike price outlined in the contract. If the stock\u2019s price falls below the strike price, you can sell the shares at a higher price than what those shares are trading for in the market, and earn a profit. Conversely, traders usually buy puts on a stock as a means of betting against that stock. Many prefer it to short selling \u2014 another way of betting against a stock. Short selling losses can exceed 100% (and are potentially unlimited) if the stock rises enough, while the worst-case scenario in put buying is losing 100% of the money you paid for the option.<\/p>\n<\/p>\n
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The appeal of selling puts is that you receive cash upfront and may not ever have to buy the stock at the strike price. If the stock rises above the strike by expiration, you\u2019ll make money. But you won\u2019t be able to multiply your money as you would by buying puts. As a put seller, your gain is capped at the premium you receive upfront. A long put is similar to a long call except that the trader will buy puts, betting that the underlying stock\u2019s price will decrease. Suppose a trader purchases a one 10-strike put option (representing the right to sell 100 shares at $10) for a stock trading at $20.<\/p>\n<\/p>\n