Put Option
A Put Option is a financial contract that gives the buyer the right — but not the obligation — to sell an underlying asset at a predetermined strike price on or before the expiry date. The buyer pays an upfront premium for this right. Indian traders use put options to take bearish positions on Nifty, Bank Nifty and stocks, or to hedge existing long portfolios against downside risk.
Key takeaways:
- A put gives the buyer the right to sell at the strike price by expiry.
- Maximum loss for the buyer is the premium paid; maximum profit is strike − 0 (limited but large).
- Used to bet on falling prices or to insure a long portfolio.
- Premium rises with time to expiry, volatility, and underlying weakness.
- Indian puts can be cash-settled (index) or physically settled (stocks).
Example of a put trade
Nifty is at 22,000 and you expect it to fall sharply on a possible US Fed surprise. You buy the 22,000-strike Nifty put expiring in two weeks at a premium of ₹130. Lot size is 25, so your total cost is ₹3,250. If Nifty drops to 21,500 by expiry, your put is worth at least ₹500. You earn (₹500 − ₹130) × 25 = ₹9,250. If Nifty stays above 22,000, the put expires worthless.
Key components
- Underlying: Index, stock, currency or commodity.
- Strike price: The price at which the holder may sell.
- Expiry: Date by which the right must be exercised.
- Premium: Cost of buying the right.
- Lot size: Quantity per contract.
When puts are valuable
- Directional bearish bet: Profit from a fall without selling the underlying.
- Portfolio hedge: Buy index puts to protect a long equity portfolio.
- Event hedge: Insure against earnings or macro surprises.
- Volatility plays: Buy puts when implied volatility is low and expected to rise.
In/At/Out of the money for puts
| Spot vs strike | Status | Implication |
|---|---|---|
| Spot < Strike | ITM | Intrinsic value present |
| Spot ≈ Strike | ATM | Highest time value |
| Spot > Strike | OTM | Only time value |
Risks for put buyers
As with calls, time decay erodes the put’s value over time. Implied volatility crush after a known event (earnings, RBI policy) can reduce premium even if direction is right. Defined-risk spread strategies — like bear put spreads — help manage these costs.
Indian-market specifics
Index puts are popular weekly trades. Bank Nifty and Nifty options dominate volumes. Stock options are physically settled at expiry — be ready to deliver shares if your put expires ITM. Sellers of puts face large margin requirements; SPAN takes into account potential losses.
Frequently asked questions
Can I exercise a put option before expiry in India?
No. Indian listed options are European-style — exercise only at expiry.
Why might a put lose value even if prices fall?
Time decay and falling implied volatility can offset directional gains. Plan trades around event timing.
What is a protective put?
Buying a put on a stock or portfolio you already own to limit downside risk.
How does Lemonn handle option settlement?
Indices are cash-settled into your account; stock options that end ITM trigger physical delivery — you must have shares (for short positions) or be ready to take delivery (for long positions).
