How Put Option Profits Work
A put option gives the holder the right to sell shares at the strike price. Long puts profit when the stock falls below the strike price minus the premium paid. Short puts (selling puts) profit when the stock stays above the strike price, allowing the seller to keep the premium.
Put options are used for bearish speculation (buying puts), hedging existing long positions (protective puts), and generating income on stocks you would like to own at lower prices (cash-secured puts).
- 1Intrinsic Value = max($75 - $62, 0) = $13
- 2P&L per share = $13 - $4 = $9
- 3Total P&L = $9 × 100 × 2 = $1,800
- 4ROI = $1,800 / ($4 × 200) = 225%
- 5Break-even = $75 - $4 = $71
- 6Max Profit = ($75 - $0 - $4) × 200 = $14,200 (if stock goes to $0)
- 7Max Loss = $4 × 200 = $800 (premium paid)
Put Option Profit Scenarios
| Stock Price | Intrinsic Value | P&L per Share | Total P&L | ROI |
|---|---|---|---|---|
| $80 | $0 | -$4.00 | -$800 | -100% |
| $75 | $0 | -$4.00 | -$800 | -100% |
| $71 | $4 | +$0.00 | $0 | 0% |
| $65 | $10 | +$6.00 | +$1,200 | +150% |
| $62 | $13 | +$9.00 | +$1,800 | +225% |
| $55 | $20 | +$16.00 | +$3,200 | +400% |
| $50 | $25 | +$21.00 | +$4,200 | +525% |
Choosing the Right Put Option
- Protective puts act as portfolio insurance against stock declines
- Cash-secured puts let you get paid to wait to buy a stock at a lower price
- Put spreads (buying one put, selling a lower-strike put) reduce cost but cap profit
- Put-call parity links put prices to call prices and the underlying stock price
- Exercise of puts results in selling shares at the strike price
Selling puts on stocks you want to own is a popular income strategy. If the stock stays above the strike, you keep the premium. If it falls below, you buy shares at the strike minus premium, which is your effective purchase price. It is like getting paid to place a limit order.