📉 Options & Cboe · Lesson 3 of 7 · 10 min
Puts: Profit From Drops & Portfolio Insurance
📉 In March 2020 the market fell 34% in a month, and a small group of people had a fantastic quarter. They hadn't predicted anything. They'd bought insurance in January — and the insurance was called a put. Puts are how you profit from a drop, or protect what you already own. Sometimes it's the same trade.
💡 Key idea
Buy put = bearish bet OR portfolio insurance. Profit when stock drops below strike minus premium.
🧠 Why it matters
A PUT gives you the right to SELL 100 shares at the strike price. Profit when stock falls BELOW strike minus the premium paid (your breakeven). Put buyers profit from declines without shorting. Portfolio managers use puts as insurance — pay a small premium now, protect against large drops later.
🌍 In the real world
🛡️ March 2020: S&P 500 fell 34% in one month. A fund manager holding $1M in stocks bought S&P puts for $15,000 in January. Those puts were worth $180,000 by March — a 12x return that offset roughly half of the portfolio's $340,000 loss.
📌 Takeaways
- Puts profit from price declines
- Puts on stocks you own = classic hedge
- In-the-money put: stock below strike price
📖 Terms in this lesson
Put option: The right to sell at a set price; a bet the price goes down, or insurance against it.
✅ Test yourself
You hold 500 shares of Tesla and buy Tesla puts. You are:
- Bearish speculator
- Hedging — protecting your long position against a drop
- Bullish on Tesla
- Day trading
Answer: B · Hedging — protecting your long position against a drop
Buying puts on stocks you own is a classic hedge — the puts gain value if the stock falls, offsetting losses on your shares.
A $100 put on a $90 stock is:
- Out-of-the-money
- In-the-money (stock below strike)
- At-the-money
- Worthless by definition
Answer: B · In-the-money (stock below strike)
A put is IN-the-money when the stock is BELOW the strike. $90 stock vs $100 strike = $10 of intrinsic value.
Who profits from buying a put option?
- The seller if the stock rises
- The buyer if the stock falls below the strike price
- Both parties equally
- Nobody — puts always expire worthless
Answer: B · The buyer if the stock falls below the strike price
Put buyers profit when the stock falls below the strike. The further it falls, the more the put is worth.
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