# Buying Put Options

Where you buy a put option with the expectation that the price of the stock will drop significantly beyond the strike price before the option expiration date.

**Payoff Diagram: Buying a Put Option**

**In this example we are using the following assumptions:**

Sol Price

**: $100**Will thinks that the the price of Sol is going down and wants to profit off of this, however he wants to reduce his potential downside, compared to a short call where the downside is potentially unlimited. Will could

**buy a put option**to accomplish this.With SOL trading at $100, Will thinks it will decrease over 10%. A put option contract with a strike price of $90 expiring in a month's time is being priced at $0.30. He decides to go long on 1000 put options with a strike price of $90, costing him $300 (1000 put options * $0.30). Now lets look at some scenarios:

**Scenario 1 (The price of SOL rises):**

If the price of SOL rises to $110, Wills 1000 put options at a strike price of $90 would expire worthless, meaning that Will would lose his initial outlay of $300. This is because the price has expired higher than the strike price of $90.

**Scenario 2 (The price of SOL stays the same):**

If the price of SOL stays the same, Wills 1000 put options at a strike price of $90 would expire worthless, meaning that Will would lose his initial outlay of $300. This is because the price has expired above the strike price of $90.

**Scenario 3 (The price of SOL falls):**

If the price of SOL falls to $89 before expiry, Wills put options are now worth $1.00 since you could exercise them and be short 1,000 SOL at $90 before immediately buying back at $89. Wills total position is now worth $1000 with a profit on the position of $700 (233%). Using a long put option allowed Will to realize a much greater gain than the 11% fall in the underlying price.

**Why trade it?**You think the price is going down within a certain time frame.

**Optimal conditions?**Cheap volatility, bearish asset.

**Cost**: The premium you pay.

**Max Profit**: If the asset goes to zero, you make the difference between the strike and zero, minus the premium you paid.

**Max Loss**: The premium you paid for the put.

**Breakeven at expiration**: The strike minus the price you paid for the put.

Last modified 1yr ago