What is a 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 expiration date. Put buyers pay a premium for this right. Put options profit when the underlying asset price falls below the strike price.
How Put Options Work
When you buy a put option, you pay a premium upfront for the right to sell at the strike price. If the asset price falls below the strike before expiration, you profit from the difference. If the price stays above the strike, the put expires worthless, and you lose only the premium.
Example: You buy an ETH put option with a $2,000 strike price for a $150 premium. If ETH falls to $1,600, you can sell at $2,000, gaining $400 minus the $150 premium, for $250 net profit. If ETH stays at $2,200, you lose the $150 premium.
Put Options as Insurance
Puts are often called portfolio insurance because they protect against downside moves. If you hold ETH and buy puts, your losses are capped at the strike price minus the premium. This hedging function makes puts valuable for protecting existing holdings during uncertain periods.
Unlike stop-losses, which sell your position when triggered, puts let you keep your assets while still limiting downside. You maintain upside exposure while having downside protection.
Put Option Terminology
In-the-money puts have strike prices above the current asset price, meaning they have intrinsic value. Out-of-the-money puts have strikes below current price. At-the-money puts have strikes near current price.
Out-of-the-money puts are cheaper but require larger price drops to profit. In-the-money puts are more expensive but provide immediate protection.
Put Options in Crypto DeFi
DeFi options protocols like Lyra, Dopex, and Hegic offer put options on major crypto assets. These protocols use liquidity pools as counterparties or match buyers with sellers. On-chain options provide transparent pricing and permissionless access but may have less liquidity than centralized venues.
Put Option Strategies
Long puts speculate on price declines with limited risk. Protective puts hedge existing holdings. Put spreads define both maximum profit and loss. Cash-secured puts involve selling puts while holding cash to potentially buy the asset at a lower price.