Buying a put means paying for the right to sell a stock at a fixed price. You win if the stock falls below that price minus your premium. Used as a bearish bet OR as insurance on your long positions.
1 contract = 100 shares. All values are per share unless otherwise noted.
You believe a stock will fall sharply (disappointing report, struggling sector, obvious overvaluation). OR you want to lock in a gain — you hold 100 shares and buy a put with a strike just below the price = a guaranteed floor.
A bullish or flat market. Theta eats the premium day after day. Also: avoid buying puts right before earnings unless you are explicitly betting on a miss — implied volatility is very expensive at that time.
You buy 1 contract = the right to sell 100 shares at the strike before expiration. At expiration: • If the stock is BELOW the strike, your put is worth (strike − price) × 100. Gain = value − premium paid. • If the stock is ABOVE the strike, your put expires worthless. Loss = premium × 100. As with the call, most traders sell the put before expiration rather than exercise (unless you hold the shares to sell).
Stock XYZ at $100. You think it will fall sharply. You buy a put with strike 95, premium $2.50, 60 days. Total cost: $250. • XYZ at $95 → put worth 0 (ATM). Loss = $250. • XYZ at $92.50 → break-even. P&L = 0. • XYZ at $85 → put worth $10. Gain = (10 − 2.50) × 100 = $750. • XYZ at $70 → put worth $25. Gain = (25 − 2.50) × 100 = $2,250. To win, the stock must fall below strike − premium ($92.50) at expiration.
You hold 100 shares of XYZ bought at $80. The stock is now at $100 (unrealized gain $2,000). You want to lock in at least $1,500 of gain for 90 days without selling. You buy a put with strike 95, premium $2. Hedge cost: $200. • If XYZ falls to $70: your put lets you sell at $95. Final gain = (95 − 80) × 100 − 200 = $1,300 (vs a $1,000 loss with no hedge). • If XYZ keeps rising to $120: your put expires worthless. But your stock is worth $12,000. Hedge cost: $200 — like an insurance premium. The put = insurance against a crash while you keep your upside.
You could also short the stock to bet bearish. Key differences: Long put: • Max loss = premium (limited). • No margin required. • Theta costs you dearly (~70 days = ~everything). • High leverage (1 contract controls 100 shares for ~$250). Short stock: • Max loss = ∞ (the stock can rise infinitely). • High margin requirement (50% minimum). • No time decay. • Daily borrowing costs (HTB = hard-to-borrow). For most retail investors: the long put is safer.
Options are high-risk derivative products. Losses can exceed the capital initially committed (particularly for uncovered short positions). Polaris provides educational content only — this is not investment advice. Consult a registered advisor (AMF) before any decision and make sure you have the appropriate level of approval from your broker.