Learn trading ideas & strategies from TradeKing's experts

Upcoming Live Events
More live events...
Learn it. Trade it.

Open your TradeKing account today!

Upcoming Live Events
More live events...

Put Options Explained


It’s strange but true: many investors who are perfectly comfortable trading call options get a little squeamish around put options. Puts are certainly nothing to be afraid of. When used properly, they can add a whole new dimension to your trading.

What are puts, exactly?

Put options are basically the reverse of calls: a call gives the owner the right to buy stock at a given price (the strike) for a certain period of time. A put, on the other hand, gives the owner the right to sell stock at the strike price for a limited time. Let’s discuss owning puts first, followed by holding a short put position.

If you own a put on stock XYZ, you have the right to sell XYZ at the strike price until the put option expires. Your maximum possible profit is obtained if the stock declines all the way to zero. The math for determining the profit is equal to the strike price less the premium paid for the put. (Don't forget to factor commissions and taxes in there, too.) On the other hand, the maximum potential risk is losing the entire premium paid to purchase the option. This happens if the stock is at or above the strike price at expiration.

If you short a put on stock XYZ, it means you’d be obligated to buy XYZ from the put holder at that strike price if the holder exercises before expiration. In return, you’d earn a premium in exchange for taking on that potential obligation, and the premium received would be the maximum potential profit for this trade. This would occur if the stock is at the strike price or higher. However, you would hit the maximum potential risk if the stock fell to zero. The loss incurred would be equal to the strike price (at which you’d be obligated to buy the security) less the premium you received. Again, these calculations don't factor in commissions or taxes, but in real-world trades you need to consider both of those.

Puts can be used to help protect profits in an existing position; they can offer a less complicated alternative to short-selling; or you can use them as a vehicle to generate income. The next few articles explain all three of these uses, with an emphasis on the first one, protective put strategy. So read on, and begin to wrap your mind around puts...it'll be well worth it.






Related Strategies

418 Front Spread w/ Puts
Front Spread with Puts Buying the put gives you the right to sell stock at strike price B. Selling the two puts gives you the obligation to buy stock at strike price A if the options are assigned. This strategy enables you...

403 Inverse Skip Strike Butterfly w/ Puts image
Inverse Skip Strike Butterfly with Puts You can think of this strategy as a put backspread with a twist. Instead of simply running a back spread with puts (sell one put, buy two puts), selling the extra put at strike A helps to reduce the...

415 Long Combination Image
Long Combination This strategy is often referred to as “synthetic long stock” because the risk / reward profile is nearly identical to long stock. Furthermore, if you remain in this position until...

More strategies...

All-Star Analysis

TradeKing is Expanding in Charlotte on 04/21/2015
As the TV jingle goes, “we’re moving on up” with our brand-new, gorgeous office space in Charlotte. We moved in just a few weeks ago, and...

TradeKing Midday Market Call Recap - $SPX & $TGT on 05/19/2015
Featuring @BrianOverby and @MNKahn   Analysis of S&P 500 from Michael Kahn with QuickTakesPro:S&P 500 (SPX) – Sitting around 2129....

Doubles - Not As Easy As It Might Seem on 12/17/2013
Alan Brochstein Analyzes Some Leading Performers in 2013This is the time of year when trading activity typically begins to slow but...

More analysis...

On-Demand Videos

Probability Calculator Tutorial Series
Part 3: Setting Target Prices

Our Probability Calculator can help you estimate your probability of success for any options strategy. Just pick...


Spreads: An Alternative to Covered Calls

Do you want to sell covered calls, but use less capital? Brian Overby explains how to use a long call bull spread as...


Probability Calculator Tutorial Series
Part 4: Introduction to Standard Deviation

Our Probability Calculator can help you estimate your probability of success for any options strategy. Just pick...


More videos...