A put is an option contract that gives the holder the right to sell a specified stock to the writer for a specified price up to the specified date. A put in many ways is actually opposite to a call. Puts can provide investors with a degree of safety, and can also be used as an aggressive investment strategy.
An option call gives the holder the right, but not the obligation, to buy a particular stock at a specified price (strike price), on or before a specified date (strike date). A put shares most of these attributes, but it gives the holder the right to SELL the stock at the strike price on or before the strike date. The right to sell to someone means that investors buy puts if they think there is a good chance that a stock they own will fall significantly in value. Conversely, aggressive investors may sell a naked put if they think that the stock price will rise significantly. A couple of examples will make this more clear.
For example, XYZ stock is trading at $50 a share and the owner of this is nervous about an upcoming earnings report. The investor may buy a $45 put for $4 a share. This means that if the stock price falls to $40 a share after a poor earnings report, the investor can sell the stock which is currently trading at $40 a share to the writer of the put for $45 a share. In this example, the investor paid $4 a share for the right to sell someone XYZ stock for $45 a share no matter where it is currently trading. If the current stock price is $20, the investor could still sell their stock for $45 a share. Since the stock price fell below the strike price, it makes sense for the investor to sell his or her shares for an amount greater than the current stock price. However, if the stock moved up to $60 a share after the announcement, then the put would not be exercised.
Bullish investors can write naked puts if they think that the stock that the put represents will increase in value. For example, XYZ stock is trading at $50 a share and the naked put investors believes that the stock price will rise after the company announces their earnings results. The investor may sell a $50 put for $4 a share. If the stock price rises to $60 a share, there is little chance that the holder of the put would want to exercise it. It would not make sense to sell your stock for $50 a share if the current market price is $60. In this example, the writer of the put profits $4 a share on a stock he or she never owned. However, if the stock price fell below $50 a share, the investor would be forced to buy the underlying stock at an amount greater than the current market price.
Many investors have trouble understanding puts, even if they have an understanding of option calls. With the safety that puts are able to provide it is important for all investors to understand the use of puts, even if they are not an integral part of one’s regular investment strategy. Additionally, the understanding of this concept can reshape an investors perspective of the opportunities that they did not know existed.
Puts 
