What is a put option?

What Is a Put? A put is an options contract that gives the owner the right, but not the obligation, to sell a certain amount of the underlying asset, at a set price within a specific time. The buyer of a put option believes that the underlying stock will drop below the exercise price before the expiration date.

How much is a put option worth?

Time value, or extrinsic value, is reflected in the premium of the option. If the strike price of a put option is $20, and the underlying is stock is currently trading at $19, there is $1 of intrinsic value in the option. But the put option may trade for $1.35.

Should you buy a put option?

Buying put options also permits an investor to benefit from a falling underlying stock price. However, put options limit an investor's risk to the cost of the option premium they paid to acquire the option. Option holders are not obligated to exercise their options, so holding an option does not represent any future liability.