Put Option
In simple terms
A put option is like an insurance policy for an asset you own. It gives you the right to sell that asset at a locked-in price, which protects you if the price drops—you're betting the value will go down.
Definition
Gives the right to sell at the strike price — a bet on price going down.
In depth
A put option is a derivative contract that grants the holder the right, but not the obligation, to sell an underlying asset at a predetermined strike price on or before the expiration date. The buyer pays a premium upfront to acquire this right and profits when the spot price falls below the strike price, since they can sell at the higher strike price. Put options are commonly used for hedging downside risk in spot portfolios or for speculative directional trades on declining asset prices. On-chain options protocols use oracles to determine settlement prices at expiration, and smart contracts enforce the exercise and settlement mechanics.
How does Put Option work?
The buyer pays a premium and receives the right to sell the underlying at the strike price. The contract gains value as the underlying falls below the strike. On most crypto venues puts are cash-settled: at expiry the exchange compares the settlement price with the strike and pays the buyer the difference if the strike is higher, and nothing otherwise. The seller keeps the premium but is on the hook for that payment and must post collateral. People who already hold an asset sometimes buy puts so a payout offsets part of a decline.
An example
Illustrative figures: someone holding 10 units of an asset priced at $1,000 buys puts struck at $1,000 for a $40 premium per unit, $400 in total. If the asset settles at $850, the puts pay $150 per unit, or $1,500. That $1,500 offsets the $1,500 fall in the value of the holding, leaving the $400 premium as the cost of the protection. Above $1,000 the puts pay nothing.
Figures are illustrative only.
What beginners get wrong
- Buying puts immediately after a sharp fall is usually expensive, because higher implied volatility is already built into the premium.
- A put buyer's loss is capped at the premium, but a put seller can be obliged to pay out no matter how far the price falls.
- Protection ends on the expiration date and has to be replaced at whatever the premium costs then, which is not fixed in advance.
- People conflate buying a put with short selling; the collateral requirements and the loss profile of the two are not the same.
Related terms
Part of
How do crypto options and derivatives work? — the subject page for options and derivatives, with all 9 of its definitions in one place.
Educational only — not financial advice.