What is Put Option?

Put option is a contract that gives the buyer of the options the right to sell the underlying security at a particular price (i.e. strike price) on or before a certain date (i.e. expiration date).
The seller (or writer) is, in turn, obligated to buy the security should the buyer chooses to exercise the option.

Put option�s price increases when the underlying stock�s price decreases, and decreases as the underlying stock�s price increases (negative relationship).
As such, we will buy a Put Option if we think that a stock will move downwards.

Example:
Using the above Company ABC example, if you anticipate the stock to drop from $23 per share, you can buy a Put option for $90 (or $0.9 per share) that gives you the right to sell 100 shares of ABC at $22.5 per share anytime in the next 90 days.

If the stock falls to $20 per share before option�s expiration:
1) You can, in theory, buy 100 shares in the open market for $20 per share and then exercise your put option which gives you the right to sell the stock at $22.5 per share. Your profit will be $1.6 per share (22.5 � 20 = 2.5 � 0.9 for option premium = $1.6 per share).

2) In practice, you would just sell your put option, which would now have a value of at least $2.5 per share (intrinsic value only) and profit by $1.6 per share (2.5 � 0.9 for option premium = $1.6 per share).