Options Trading

Learn the fundamentals of options trading step by step. From the basics to advanced strategies.

1
What Are Options
2
Call Options
3
Put Options
4
Pricing
5
The Greeks
6
Spreads & Liquidity
7
Strategies
8
Risk Management
9
Earnings Strategies
10
Common Mistakes

1 What Is a Put Option?

A put option gives you the right, but not the obligation, to sell 100 shares of a stock at a specific price (the strike price) on or before the expiration date. You pay a premium upfront for this right.

The Core Idea

Buying a put is a bet that the stock will go down. If it does, your put increases in value. You can also use puts to protect a stock position you already own — like insurance against a drop.

2 Buying a Put (Long Put)

When you buy a put, you're paying a premium for the right to sell 100 shares at the strike price. This is the most basic bearish options trade, or a way to hedge an existing stock position.

Example: AAPL $180 Put @ $4.00
  • Cost: $4.00 x 100 shares = $400 total premium
  • Breakeven: $180 - $4 = $176 (stock must be below this at expiration to profit)
  • Max loss: $400 (the premium you paid) — this happens if AAPL stays above $180
  • Max profit: $17,600 (if AAPL goes to $0: ($176 x 100) — theoretical, stock rarely goes to zero)
When to Buy a Put
  • You're bearish on the stock and expect it to drop before expiration
  • You own the stock and want to protect against a decline (protective put)
  • You want to profit from a market crash without shorting stock
  • Implied volatility is relatively low (premiums are cheap)
The Catch

Like long calls, most long puts expire worthless. You need the stock to drop enough to overcome the premium you paid. And puts tend to be more expensive than calls at similar distances from the stock price because of volatility skew — the market charges more for downside protection.

3 Selling a Put (Short Put)

Selling a put means you collect premium upfront, but you're obligated to buy 100 shares at the strike price if the buyer exercises. This is a bullish or neutral bet — you profit if the stock stays above the strike.

Example: Sell AAPL $170 Put @ $3.50
  • Credit received: $3.50 x 100 = $350
  • Max profit: $350 (if AAPL stays above $170)
  • Max loss: $16,650 (if AAPL goes to $0: ($170 - $3.50) x 100)
  • Breakeven: $170 - $3.50 = $166.50
Cash-Secured Puts

A cash-secured put means you have enough cash in your account to buy the shares if assigned. It's a popular strategy for buying stocks at a discount — you get paid to wait for the stock to drop to your target price. If the stock stays above the strike, you keep the premium. If it drops below, you buy shares at an effective price of $166.50 (strike minus premium) — which was the price you wanted anyway.

4 How Put Prices Move

A put option's price is driven by the same factors as calls, but in the opposite direction for stock price.

  • Stock price goes down: Put value increases (delta is negative)
  • Time passes: Put value decreases (theta decay erodes premium)
  • Implied volatility rises: Put value increases (fear drives demand for puts)
  • Market crashes: Puts can spike dramatically because both the stock drops AND volatility surges at the same time
In-the-Money vs Out-of-the-Money Puts
  • ITM put (stock < strike): Has intrinsic value. More expensive but higher probability of profit.
  • ATM put (stock ≈ strike): Most sensitive to all Greeks. Highest time value.
  • OTM put (stock > strike): Cheapest. Popular for hedging because they're affordable insurance. But most expire worthless.

5 Puts as Protection (Hedging)

One of the most practical uses of puts is protecting a stock position. If you own 100 shares of AAPL at $180, buying a $170 put guarantees you can sell at $170 no matter how far the stock drops. The cost of the put is your insurance premium.

Protective Put Example
  • You own 100 shares of AAPL at $180
  • You buy 1 AAPL $170 Put for $3.00 ($300 total)
  • If AAPL drops to $150, your shares lose $3,000 but your put is worth $2,000 — net loss is $1,300 instead of $3,000
  • If AAPL goes up, your put expires worthless but your shares profit — the $300 was the cost of insurance
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6 Key Takeaways

Key Takeaways

  • A put gives you the right to sell 100 shares at the strike price.
  • Buying puts = bearish bet with limited risk (premium paid).
  • Selling puts = collecting premium with obligation to buy shares if assigned.
  • Cash-secured puts are a popular way to get paid to wait for a stock at your target price.
  • Protective puts act as insurance for stock positions you want to keep.
  • Puts tend to be more expensive than equidistant calls due to volatility skew.
  • Puts spike in value during crashes because stock drops and volatility surges happen together.
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