How a put option works
By Jude Wallis
A put option gives its buyer the right to sell an asset at a strike price. At expiry, a long put is worth the amount the strike exceeds spot, or zero. Spot $40 against a $45 strike with a $1.50 premium has $5 of intrinsic value and $3.50 of profit per share.
Offer premium
30.00%
$52.00 offer against $40.00 unaffected, a premium of $12.00 a share.
- Unaffected price
- $40.00
- Offer price
- $52.00
- Spread per share
- $12.00
The share price before the offer leaked. The unaffected close, not the last trade.
On this page
In short
- A long put gains intrinsic value at expiry only when spot is below the strike.
- Spot $40, strike $45, premium $1.50: intrinsic value is $5 and profit is $3.50 per share.
- Spot $48 against the same strike and premium: intrinsic value is $0 and the loss is the $1.50 premium.
- The buyer can lose the premium and is not required to sell at the strike when the market is higher.
A right to sell at the strike
A put option is a contract on an underlying asset. The buyer pays a premium for the right to sell that asset at the strike by expiry. The seller receives the premium and takes the matching obligation.
This sheet is one long put, valued at expiry, per share. Listed equity puts often use a one-hundred-share multiplier. That multiplier is not applied here, so every dollar is a per-share dollar.
How call options work is the right to buy. A put is the right to sell. The two payoffs are not mirrors once the premium is in a different place, but the intrinsic-value floor at zero is the same idea.
A put is not a short sale
Short selling borrows the asset and sells it now, with a later buy-back. A long put pays a premium for the right to sell at the strike, with a loss capped at that premium on this sheet. The two are both ways to benefit if the price falls. They are not the same contract.
How stocks work is the ownership claim. Risk and return is why a payoff diagram is not an expected return. How margin accounts work is borrowed stock and borrowed cash, which a long put does not require on this sheet.
Scope of this sheet
The two teaching rows are spot $40 with $3.50 of profit and spot $48 with a $1.50 loss, both on a $45 strike and a $1.50 premium. They are expiry values, per share, with the premium held still. Spreads, early exercise, and dividends sit outside this identity. This is educational material, not financial advice.
Worked examples
A put in the money at expiry
Spot is $40. The strike is $45. The premium paid was $1.50 per share. What are intrinsic value and profit at expiry?
- Intrinsic value is strike minus spot: , so $5.
- Profit is $5 minus the $1.50 premium, which is $3.50.
Intrinsic value is $5. Profit is $3.50 per share.
A put out of the money at expiry
Spot is $48. The strike is still $45. The premium is still $1.50. What is the expiry result?
- Spot is above the strike, so intrinsic value is $0.
- Profit is $0 minus $1.50, which is a loss of $1.50.
Intrinsic value is $0. The per-share loss is the $1.50 premium.
Common questions
Can a long put lose more than the premium?
On this expiry sheet, no. Intrinsic value cannot go below zero, so the worst per-share result is minus the premium. Margin, assignment on a short put, and transaction costs are different objects.
Is a put the opposite of a call?
A put is the right to sell, a call is the right to buy. Put-call parity links their prices on the same strike and expiry, but the two payoff shapes after a premium are not simple opposites.
Keep reading
This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.