A Put Option is a type of financial derivative contract that gives the buyer the right, but not the obligation, to sell an underlying assetósuch as a stock, index, or commodityóat a predetermined price, known as the strike price, within a specified period. Investors use put options to hedge against potential declines in the price of their holdings or to profit from bearish market expectations.

In a put option contract, the buyer pays a premium to the seller (also known as the option writer) in exchange for this right. If the market price of the underlying asset falls below the strike price, the buyer can sell the asset at the higher strike price, making a profit. Conversely, if the market price remains above the strike price, the buyer may let the option expire, losing only the premium paid. This limited-risk feature makes put options a valuable risk management tool.

Traders and investors often use put options for two main purposesóhedging and speculation. Long-term investors may buy puts to protect their portfolios from downside risk, a strategy known as a protective put. Short-term traders, on the other hand, may use puts to benefit from anticipated price declines without short-selling the underlying asset. The optionís value is influenced by factors such as the underlying assetís price, volatility, time to expiration, and prevailing interest rates.

Understanding how put options work is essential for anyone participating in the derivatives market. While they can effectively manage risk or enhance returns, options trading carries inherent complexities and should be undertaken with proper knowledge and risk assessment. Investors should ensure they fully understand option pricing and market behavior before trading.