Technical analysis

A Simple Guide to Put Options: How to Protect Your Money in the Stock Market

A put option is a safety net for your stocks. It lets you sell at a set price, protecting you from a fall or even letting you profit from it.

T Jackson

27 Nov 2025 — 4 min read

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Abstract

A put option is a safety net for your stocks. It lets you sell at a set price, protecting you from a fall or even letting you profit from it.

If you've ever wished you could protect yourself from losing money when a stock price falls, put options might be precisely what you're looking for. Think of a put option like an insurance policy for your stocks; it gives you the ability to sell a stock at a price, even if the actual price drops much lower. Let me show you how this works using a made-up stock called AAAX.

Put Option Defined

A put option is a contract that gives you the right to sell a stock at the specified strike price (the specified price specified in the put contract) before a specific date. The strike price in the contract is the price at which it is bought or sold. The contract's expiration date is called the “expiration date.” Or, you are not required to exercise the contract and sale.

Let's say AAAX stock is currently trading at $10 per share. You think the price might drop soon, so you want to protect yourself. You could buy a put option with a $10 strike price that expires in three months. This contract might cost you $50 (the "premium").

How Does It Work?

Here's where it gets interesting. If AAAX stock drops to $6 per share next month, your put option becomes valuable. Why? Because your contract gives you the right to sell AAAX shares at $10, even though they're only worth $6 in the market. That's a $4 difference per share, and since each option contract covers 100 shares, you could make $400 (minus the $50 you paid for the option).

On the other hand, if AAAX stock rises to $15 per share, you wouldn't exercise your put option. After all, why would you sell shares at $10 when you could sell them at $15 in the regular market? In this case, you'd let the option expire, and you'd only lose the $50 premium you paid.

Step-by-Step: How to Buy a Put Option

Step 1: Open a Brokerage Account. You need an account with a broker that allows options trading. Most major brokers offer this, but you'll need to apply for options trading approval.

Step 2: Get Approved for Options Trading. Brokers will ask about your investment experience and financial situation. They want to make sure you understand the risks involved.

Step 3: Choose Your Stock and Strategy. Decide which stock you want to buy a put option for. In our example, it's AAAX trading at $10.

Step 4: Select Your Strike Price and Expiration Date. You'll need to choose the price you're entitled to sell at (the strike price) and the option's expiration date. For example, you might choose a $10 strike price with an expiration date three months away.

Step 5: Place Your Order. Enter your put option order through your broker's platform. You'll see the premium (cost) before you confirm.

Step 6: Monitor Your Position. Watch how AAAX performs. If the price falls below your strike price, your put option increases in value.

Two Ways to Use Put Options

Method 1: Protective Puts An Insurance Policy for Your Stocks. Imagine you own 100 shares of AAAX stock. Buying a "protective put" is like buying an insurance policy for it. If the stock price crashes from $10 to $6, you'll lose money on the shares you own. However, your put option will help offset some of those losses. It's a safety net for your money.

Method 2: Speculative Puts. Think of a put option like a bet on a losing team. Even if you don't own shares of AAAX, you can buy a put option if its price falls from $10 to $6. If you're right, you make money from its decline.

Important Things to Remember

Put options have expiration dates, so timing matters. If AAAX doesn't drop before your option expires, you don't see the premium you paid. Also, options can be complex, and you can lose your entire investment if the stock doesn't move the way you expect.

Think of the premium as the maximum you can lose. In our example, the most you could lose is the $50 you paid for the put option. However, your potential profit can be substantial if the stock price falls significantly.

Finally

Put options are a versatile tool for investing. They can be used as a shield to protect the profit of the stocks you already own, or as a way to potentially profit when you feel certain a stock's price is headed down. Just remember, they can be tricky. It's always smart to learn the rules of the game before you start playing with real money. Do your own research and consider talking to a financial advisor before making investment decisions. Options trading involves you, and it's essential to fully understand what you're getting into before you start trading.