Put option explained

A put option gives its buyer the right, but not the obligation, to sell the underlying at a fixed price (the strike) until the option expires. On the Indian option chain puts are marked PE. A put gains value when the price falls below the strike, so it is used both to profit from a fall and to protect against one.

The buyer (long put) pays the premium. The seller or writer (short put) receives it and must pay the difference if the price ends below the strike. If you are new to options, read what calls and puts are first; a put is simply the call turned upside down.

How a put's value is worked out at expiry

At expiry a put is worth whatever the strike is above the price, and nothing if the price is above the strike:

Put value at expiry = maximum of (strike − underlying price, 0)

The buyer's breakeven is below the strike, by exactly the premium paid:

Breakeven = strike − premium paid

A worked example: buying a NIFTY put

NIFTY is at 25,000. You expect a fall this week and buy the 24,900 put at ₹85. Assume a lot of 75 units (check the current figure on NSE). The cost is 85 × 75 = ₹6,375 plus charges, and the breakeven is 24,900 − 85 = 24,815.

The loss never goes beyond ₹6,375, however high NIFTY goes. The gain grows with every point NIFTY falls below 24,815. Unlike a call, a put's gain has a ceiling, because a price cannot fall below zero, but for an index that ceiling is far away.

Puts as insurance for a portfolio

The most common long-term use of puts is protection. Suppose an investor holds a portfolio of large Indian companies worth ₹20 lakh that tends to move like NIFTY. A NIFTY lot at 25,000 with 75 units covers about ₹18.75 lakh of exposure. Buying one NIFTY put a little below the current level for the next month costs a premium, perhaps one to two percent of the cover, depending on volatility.

• If the market falls 8%, the portfolio loses roughly ₹1.6 lakh, but the put gains a similar amount below its strike, cushioning the fall.
• If the market rises, the put expires worthless. The premium is the cost of insurance, like a car insurance premium you are glad you never claimed.

This is called a protective put, and the portfolio hedging guide works through how many lots and which strikes to consider. Insurance is never free: buying puts every month can eat a meaningful share of returns in calm years.

The put seller's side

The seller of the 24,900 put receives ₹6,375 and keeps it if NIFTY stays above 24,900. Below 24,815 they lose ₹75 for every point. In a sudden 5% fall to 23,750 they would lose (24,900 − 23,750 − 85) × 75 = ₹79,875, over twelve times what they collected. Markets tend to fall faster than they rise, so put sellers face sharp, sudden losses. Brokers require large margins for this reason.

Some investors sell puts at a level where they would be happy to own a stock anyway, accepting the chance of buying it at the strike. Others limit the risk by also buying a lower put, which creates a bull put spread.

See put prices and put open interest live

On the option chain, puts are on the right-hand side. Here is today's NIFTY chain around the current price:

Put prices rise as you go down to higher strikes, because the right to sell at a higher price is worth more. Look at the put open interest column too: the strike with the most open puts below the current price is where many sellers have committed, and traders watch it as a possible support level. The overall balance of put and call open interest is summed up below:

A put-call ratio above 1 means more puts than calls are open. Because sellers hold most of that open interest, a rising ratio is often read as support building, but it can also reflect heavy hedging. The PCR guide explains both readings.

What moves a put's price before expiry

• Delta is negative for puts, between 0 and −1. An at-the-money put has a delta near −0.5: if NIFTY falls 100 points, it gains about ₹50.
• Time decay works against the buyer every day, faster near expiry.
• Implied volatility often jumps when markets fall, because fear rises. That is why puts can gain sharply on down days, more than delta alone would suggest. Put prices are usually a little richer than calls at the same distance from the price; this is called skew.

Put buyers should also watch India VIX, the market's measure of expected NIFTY volatility over the next 30 days. When VIX is low, puts are relatively cheap and protection costs less. When VIX has already spiked, the same put can cost twice as much. Comparing today's VIX with its own past year is the idea behind IV rank:

A low IV rank means options are cheap compared with the past year, which suits buyers of protection; a high rank means they are expensive, which is when sellers are more active. Neither tells you which way the market will go next.

Puts on stocks and commodities

Stock puts follow the same arithmetic, but stocks can gap down on results or news far more than an index, so their puts carry higher implied volatility. The lot size is set separately for each stock, and in-the-money stock puts held to expiry are physically settled: the buyer may have to deliver the shares. MCX puts on gold, silver or crude oil are options on the commodity's futures contract and react to global prices through the evening session. In every case the buyer's maximum loss is the premium; the seller's risk is the fall.

Common mistakes with puts

• Buying puts after a big fall. Volatility is already high, so puts are expensive and can lose value even if the fall continues slowly.
• Hedging too late or too little. Insurance bought after the storm costs much more. Size hedges to the portfolio, not by guesswork.
• Selling far puts as "safe income". They usually expire worthless, until a crash makes one trade wipe out months of gains.
• Forgetting stock option settlement. An in-the-money stock put held to expiry may require you to deliver shares. Check the exchange rules and your broker's policy.