How to Buy a Put: From Account Setup to Placing an Order

A put option is a financial contract giving the holder the right, but not the obligation, to sell an underlying asset at a predetermined price on or before a specified date. This contract allows an investor to potentially benefit from a decline in the asset’s price without directly owning the asset.

Understanding Put Option Fundamentals

A put option derives its value from an underlying asset, typically a stock or exchange-traded fund. Its price movements are directly tied to this security.

Every put option contract specifies a strike price, the fixed price at which the underlying asset can be sold. It also includes an expiration date, the final day the option can be exercised. After this date, the contract becomes void if not acted upon.

The premium is the price paid by the buyer for the put option contract. This upfront cost is the maximum an investor can lose if the option expires worthless. The premium reflects the underlying asset’s price, volatility, and time until expiration.

A put option is “in-the-money” if the underlying asset’s price is below the strike price. It is “at-the-money” if the price equals the strike price. Conversely, it is “out-of-the-money” if the price is above the strike price, indicating no intrinsic value.

Why Investors Buy Put Options

Investors often buy put options for two reasons: hedging or speculation. Hedging protects an existing investment from downward price movements. For example, an investor holding shares might buy put options to limit losses if the stock price falls, acting as portfolio insurance.

Speculation is another common motivation. An investor anticipating a decline in an underlying asset’s price can buy put options to profit from that downturn. If the asset’s price falls below the strike price, the option’s value typically increases, allowing the investor to sell it for a profit. This strategy offers leverage, where a small price movement can lead to a significant percentage change in the option’s value.

Opening an Options Trading Account

Before trading options, establishing an approved brokerage account is necessary. Choose a brokerage by considering platform features, fee structures, and investment products. Many online brokers offer competitive commission structures, often with a per-contract fee for options.

After selecting a brokerage, individuals complete a standard account application, then a specific application for options trading privileges. This options application requires detailed personal and financial information, including name, address, Social Security number, and employment details.

The application also requests financial status, including net worth and annual income. Trading experience, risk tolerance, and investment objectives are required. Brokers use this information to assess suitability and assign tiered approval levels for options trading, which can take a few business days.

Once approved, funding the account allows for trading. Investors can deposit funds through various methods, such as electronic or wire transfers. This ensures the necessary capital to cover options premiums and associated fees.

Placing a Put Option Order

With an approved and funded options trading account, navigate the brokerage’s platform to place a put option order. Most platforms feature a dedicated options trading interface, accessible via the underlying asset’s quote page or options chain tab. Locate the desired underlying asset, such as a stock or ETF.

When initiating the order, specify “Buy to Open” to establish a new long put position. Select “Put” as the option type. Choose a desired expiration date from the available options series, which determines how long the contract remains valid.

Next, select a specific strike price, the price at which the underlying asset can be sold if the option is exercised. Enter the number of contracts desired; one option contract generally controls 100 shares. Finally, choose an order type, such as a limit or market order. A market order executes immediately at the best available price, while a limit order executes at a specified price or better.

Before submitting the order, carefully review all details: the underlying asset symbol, option type, expiration date, strike price, number of contracts, and order type. Once confirmed, the order can be submitted for execution.

Managing and Exiting a Put Option Position

After purchasing a put option, monitor the position by tracking the underlying asset’s price movements and their effect on the option’s market value. The premium fluctuates based on the underlying asset’s price, time decay, and implied volatility.

The most common way to exit a put option position is by “selling to close” the contract before its expiration date. This involves selling the same put option initially bought, locking in gains or limiting losses. Selling to close is often more advantageous for retail investors than exercising, as it avoids complexities and capital requirements of selling shares.

Exercising a put option means enforcing the right to sell the underlying shares at the strike price. This action is generally reserved for deep in-the-money options where the investor wishes to sell shares they own or acquire. Selling to close the option in the open market is often more efficient for most retail traders.

If a put option is not sold or exercised before its expiration date, it will expire. If out-of-the-money at expiration (underlying asset’s price above strike price), the option expires worthless, and the investor loses the premium paid. If in-the-money, some brokerages may automatically exercise, while others require specific instructions.