What it is
You pay a premium for the right to sell 100 shares at the strike until expiry. If the stock ends below the strike the put is worth the gap; above it, the put expires and the premium is gone.
It is used two ways. On its own it is a bet that the stock falls, with the premium as the most it can lose. Next to shares you own it is insurance: if they fall below the strike, the put gains what the shares lose, and the premium is what the cover costs.
What has to happen for it to make money
The stock has to fall below the strike less the premium by expiry. Above the strike the put finishes worthless. Under the break-even it gains a dollar per share for each dollar of fall, down to a price of zero, which is its largest possible payoff.
Rising volatility helps while it is open, and falls usually bring rising volatility with them, so a put often gains from both at once. Time hurts, steadily, every day the fall does not come.
Once it is on
As a bet, it is usually sold before expiry to keep the time value that exercise would forfeit. As insurance, the question is how long to carry it. Buying protection every month adds up to a large yearly cost, so many holders buy it only for a stretch they are worried about, choose a strike well below the price to make it cheaper, or pay for it by selling a call, which makes it a collar.
What goes wrong
The fall does not come. Markets rise more often than they fall, and a put held through a quiet or rising stretch expires worthless, cycle after cycle. Insurance bought continuously is a drag on returns in every year it is not needed.
Buying after the scare. Puts are cheapest when nobody wants them and most expensive just after a sharp fall, when volatility has already jumped. Protection bought at that point costs the most and covers a fall that has partly happened.
Pros and cons
- Pro: gains in a fall, and the cost is the whole risk.
- Pro: a defined floor under shares it protects.
- Pro: often gains from rising volatility as well.
- Con: expires worthless whenever the fall does not come.
- Con: continuous protection is a steady cost.
- Con: dearest at the moment people most want it.
In Restrike
Bought puts are tracked in dollars on the Log and count toward the win rate once closed, outside the premium-kept meter. A put held next to the shares it protects can carry the same strategy label as them. Restrike reads it read-only from your broker and never places a trade.